Credit Score Basics > Does a loan getting declined affect credit score?

Does a loan getting declined affect credit score?

Wollit Team2 minute read · Updated 16th September 2024

If you apply for a loan and get turned down, it won't directly lower your credit score. However, the process of applying for the loan can cause a small drop in your score. When you apply for a loan, the lender checks your credit report. This is called a hard check.

While a hard inquiry can lower your credit score by a few points (usually less than 5), this effect is temporary. Your score should go back up in a few months if you keep using credit wisely.

Also, a hard check doesn’t show whether you were approved or declined. This means that your credit score will suffer this small drop regardless of whether you were approved or denied. It happens to everyone.

How long does a declined loan stay on my credit report?

Declined loans don’t stay on your credit report. But hard checks from applying to a loan do.

Hard checks can stay on your credit report for up to two years in the UK. However, you shouldn’t stress about it too much: their impact on your score gets smaller over time. After about a year, the effect is usually very minor.

Also, if you see any mistakes or wrong information about a declined loan on your credit report, you can challenge it with the credit agencies to get it corrected. You might also be the victim of identity fraud – best to check to see why there’s a hard check you don’t recognise.

What to do if my loan application is declined?

If your loan application is declined, the first step is to read the notice from the lender. This notice should explain why your application was rejected, often based on your credit report.

Next, get a copy of your credit report and check it for mistakes or negative information that might have led to the decline. If you find errors, you can dispute them with the credit agencies.

If your credit score is good but you still get declined, it might be because of other reasons, such as:

High levels of debt compared to your income;
Mistakes on your credit report;
Being financially linked to someone with bad credit;
Or not having enough credit history;

To improve your chances of getting approved for a loan in the future, focus on addressing these issues.

First, reduce your debt: one way to do this is by getting a balance transfer card, which can give you up to a year to pay down your existing credit card debt without additional interest.

Second, avoid making too many loan applications. You should also use an eligibility checker wherever possible, since these don’t run an actual hard check. Also, if you’re looking for a specific type of loan, like a car loan or mortgage, multiple inquiries within a short time (usually 14-45 days) are often treated as one inquiry. This means that shopping around for these loans won’t hurt your score as much.

Third, if you’re linked financially to someone with bad credit, consider submitting a Notice of Disassociation to the credit agencies. This has nothing to do with your actual relationship, by the way. So if your credit file is linked to your partner because of a joint account, you don’t need to divorce them. You just need to separate accounts and submit this notice. This will keep your credit scores safe.

Finally, build your credit history, which is the most important factor for your credit score. One of the ways to do this is to sign up to a credit-building subscription like Wollit.

Wollit works by reporting a fixed fee monthly subscription as a loan repayment to the credit reference agencies (Experian, Equifax, and TransUnion). This helps you build or rebuild your credit history by showing that you can pay debt on time.

It can even report your monthly rent payment to Experian, adding another line in your credit report that shows lenders you're responsible and pay your bills when they’re due. In time, this will help you improve your credit score so you won’t need to be worried about any credit check ever again.