Here's What Happens to Your Credit Score When You're Denied a Loan

There may come a point when you decide to take out a personal loan. Maybe you have a home you desperately need to furnish. Or maybe you're looking to renovate an outdated kitchen to make it more functional.

The higher your credit score is at the time of your loan application, the more likely you are to get approved. But rest assured that if you aren't approved for a loan, your credit score shouldn't take an extra hit.

A rejection won't worsen your credit score

Any time you apply for a loan or credit card, a hard inquiry is done on your credit report. And that will usually result in a modest drop in your score -- somewhere in the ballpark of five points or so.

A hit that small generally won't have much of an impact. If your credit score is a 640, which Experian says is in the fair range, a five-point drop that brings your score down to 635 may not have much of an effect on your ability to borrow. A lender may decide to deny you whether your score is a 640 versus 635.

Similarly, if your credit score is an 815, which is considered exceptional, having it fall to an 810 shouldn't really hurt your chances of getting the loan or credit card you want. That's still a really excellent credit score, and a lender is apt to note that when reviewing your application.

You may also find it comforting to know that being denied a loan won't hurt your credit for the worse. A loan denial won't show up on your credit report, says Experian. However, the hard inquiry on your credit as a result of your application will. And your credit score might take a small hit because that's what happens any time you apply for credit.

But all told, your credit score will generally sustain the same amount of very limited damage whether you put in a loan application that's approved or denied.

It's best to apply for a loan you're likely to qualify for

A loan application denial generally won't hurt your credit score any more than an approved application. But since there's a small credit score drop associated with a hard inquiry, it's best to only have one of those inquiries on your record if your chances of getting approved are reasonably strong to begin with.

Some lenders publish credit score requirements on their websites so you can check out what's needed to qualify for a loan. And if that information isn't available in print, you could always call the lender to find out whether your score is likely to suffice.

You may also want to consider holding off on applying for a loan if you know your credit score isn't so great. Even if you get approved to borrow money in that situation, you might get stuck with a really unfavorable interest rate on your loan. But if you're able to boost your credit score and then apply for a loan, you may not only get approved, but snag an interest rate that has you paying less.

There are different steps you can take to boost your credit score, such as paying your bills on time and correcting errors on your credit report. Paying down credit card debt could also help your score improve. However, if you're looking to get a loan, it could indicate that you're not in a position where you're able to pay off a chunk of existing debt.

Either way, know that being denied a loan shouldn't hurt you too badly from a credit score perspective. A rejected application may come as a blow, and you might need to put certain plans on hold. But you can rest assured that there shouldn't be a black mark on your credit report, and you shouldn't anticipate a massive plunge in your credit score because a lender said no to your request.