You already had plans for all the rewards you were going to earn with your new credit card when you learned your application was denied. Suddenly, your dreams of a trip to Hawaii are shattered. The good news is that the rejection has a limited impact on your credit score, and you may even learn a thing or two that will help you get approved in the future.
No Worse Than Other Inquiries
Any time you try to get credit, such as a mortgage, car loan or credit card, the lender pulls your credit score to see how you've handled your past debt. When the lender does this, the credit bureau notes an inquiry on your credit report. When the inquiry occurs as a result of you applying for credit, other creditors can see the inquiry and it will have an impact on your credit score. However, the other creditors don't get to see the result of the inquiry (i.e. you were denied) so any negative result won't affect your credit score.
How Inquiries Affect Your Score
Inquiries show how much credit you've recently applied for, which accounts for 10 percent of your FICO score. According to the Fair Isaac Corp., which develops the credit-scoring algorithm, just one inquiry will have little to no impact on your credit score. However, unlike inquiries for car loans and mortgages, which get treated as a single inquiry as long as they are within a short period of time, each credit card application counts as a separate inquiry. For example, if you went on a credit card application spree and applied for five new cards, five new inquiries would show up on your credit score.
How Long Inquiries Last
After an inquiry appears on your credit report, it remains for two years. However, the FICO scoring algorithm only takes into account inquiries from the previous 12 months. That means that one year later, your credit card application, even though it was denied, will no longer have any effect on your credit score. For example, if you get denied for a credit card January 2012, that inquiry will no longer hurt your credit score after January 2013.
Learning from Denial
Albeit painful, failure is often a great teacher. If a credit card company denies your application, the Equal Credit Opportunity Act requires the company to tell you why. The company must also tell you the name and address of the credit bureau it received the information from. For example, you may have a spotless credit score with Experian, but your TransUnion credit score might have incorrect information. If the credit card company denied you because it looked at the TransUnion score, you can find out that you need to check all of your credit reports to make sure they contain accurate information.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."