by Marco Angioni II

Created on: February 03, 2010

Many times throughout life, you will have to fill out and submit a loan application.  If you need a loan to buy a house, buy a car, or go to college, to name a few, a loan application is necessary.  In fact, applying for a credit card is considered a loan application. 

Although you receive no money up front from credit cards, you do receive a line of credit that you can utilize to make purchases and even obtain cash advances.

Because you will have to fill out and submit these applications throughout your life, it is important to know whether these applications can bring down your credit score. 

The application itself does not bring down your credit score, but the events that naturally progress from the submission of these applications can, unfortunately, bring down your credit score.

Credit Report Inquiries:

When you apply for a loan, it is almost a guarantee that your credit report will be pulled (or that a lender will “inquire” about your credit) so that the lender can analyze your creditworthiness. Every time your credit report is pulled, an inquiry is recorded in your credit report. 

The reason that an inquiry is recorded is because lenders what to see how often and how many times you have requested credit in the past. Generally, inquiries stay on your credit report for two years.

After a certain amount of inquiries are reported in your credit report, your credit score begins to drop. The exact number of inquiries necessary to lower your score is not know because credit score companies keep their formula for calculating credit scores a secret. They keep these formulas a secret to minimize the ability of people to manipulate their credit scores.

Regardless, the point is, too many inquires will result in a lower credit score, and inquiries occur when a lender pulls a copy of your credit report.

Total Amount of Outstanding Credit:

Lenders consider having too much credit, even if you have no debt, a bad thing. The thought is that you “could” use that credit in the future and if you do, you may not be able to pay it back. Of course this is complete speculation, but lenders are very protective over the money they lend. 

A loan application will not automatically give you more credit, but if you are approved, your total available credit will increase. This is true only with revolving credit lines. 

Installment loans, such as auto loans, mortgages, and student loans, will not raise your total available credit because you cannot borrow against an installment loan.

If you obtain too many (a number which is again kept a secret) revolving credit lines, your credit score could take a negative swing.

Remember, a loan application itself will not bring down your credit score, but the events that follow could. Avoid too many inquiries and too much credit to prevent your credit score from decreasing.

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