Does a Pre-Qualify Affect Your Credit?

Pre-qualification is a process you use to determine whether a lender will likely accept you if you would apply for a loan product through the company. The pre-qualification is not the full credit application, but the lender does need to pull your credit to see if any major red flags exist with your credit application. Each pre-qualification requires a credit inquiry on your credit report.

Reasons

You use a pre-qualification when you wish to know whether a lender would seriously consider you for a loan, based on your credit report. While the actual application may later be denied based on other factors not shown on your credit report, such as your financial situation. Pre-qualification are often used for larger loans such as car loans or mortgages, so that you know whether you could go through the entire process without being held up by credit report factors.

Credit Inquiry

A credit inquiry is added to your credit report when a company pulls the report. Each credit "pull" adds another inquiry to your report. These inquires stay on your report for two years before dropping off entirely, although the majority of the slight negative credit effect drops off after the first year that it has been on your report. While all credit pulls done for pre-qualification purposes result in a credit affecting mark on your credit report, you can pull your own credit report without adding a negative inquiry on your report.

Concerns

While a single credit inquiry is not a cause for concern, multiple inquiries can have a significant effect on your credit report. If you are shopping around for the best credit rates or you are using a mortgage broker or financing department that runs you through multiple companies, you may end up with many different inquires on your credit report. As long as the rate shopping inquires are done within 30 days of each other, they are grouped together as one inquiry. If you spread the inquiries out, however, each mark would be treated as an individual one.

Denials

If you are looking at other lines of credit while rate shopping for a loan, you may have to worry about companies who wish to disqualify you based on the amount of inquiries on your report. This typically happens if you spread the pre-qualification inquiries out over a significant period of time, as it may appear that you are seeking large amounts of credit instead of the rate shopping you are actually doing.