Unfortunately, there are a lot of different reasons you could be rejected for a new line of credit that extend beyond how good or bad your credit score is. In most cases, when a lender is judging your credit application they’ll consider both your score and your credit report, which contains a history of your financial behavior over the last couple of years.
If you’ve been rejected for a new line of credit recently and are trying to understand why, here are some potential reasons.
Common Reasons an Applicant Is Rejected for Credit
1. You Have Recent Missing or Late Payments in Your Credit History
FICO® scoring models use five factors to calculate your credit scores, but payment history is the most important. In fact, payment history accounts for 35{e6a1e97ec1a15155ca0ed8c3e87721e561c99ed6e52274045963a20278fc2089} of your score, so a single missed or late payment can have a big impact on your credit.
If you’re rejected for credit due to missing or late payments, the best thing you can do is start making all your payments on time while you wait for those negative items to age off your report. Start a history of making on-time payments to outweigh the negatives.
In the meantime, it might be a good idea to avoid applying for new credit until you have at least 6 months’ worth of on-time payments under your belt.
2. Too Many Recent Inquiries
Every time you apply for a credit card or a loan, the lender reviews your credit report. As soon as a lender pulls your report, a “hard inquiry” appears on your credit history. Inquiries don’t have as much of an impact on your score as missed payments or late payments, but lenders view too many recent inquiries as a potential red flag.
For example, someone who can’t afford to pay their bills may apply for three or four loans or credit cards in the same week. This makes lenders worry they won’t be able to meet their financial commitments.
The good news is that inquiries only remain on your report for 2 years. If you’ve been denied due to too many recent inquiries, stop applying for credit. Previous inquiries will eventually fall off your credit reports.
3. Bankruptcy Filed
Bankruptcy is a legal process used to discharge or reorganize a person’s debts. Filing bankruptcy makes it possible to get a fresh start after a period of financial hardship. However, it also has a negative impact on your credit score. When you discharge debts, you aren’t paying them as agreed, making lenders hesitant to work with you in the future.
If you’re having a hard time applying for a new line of credit after a bankruptcy, you might consider building back good credit in the meantime with something like a credit builder loan or a secured credit card. In many instances, these products are secured with a cash deposit and don’t require credit approval.
It may also be helpful to have a family member add you as an authorized user on one of their credit cards. If your family member pays on time and stays under their credit limit, becoming an authorized user can help you take advantage of their positive behaviors.
4. Collection Account Added to a Credit Report
If you miss several payments, a creditor may sell your debt to a collection agency, causing a collection account or even a charge-off to appear on your credit report. A collection indicates that you defaulted on one of your financial obligations, making lenders think twice about approving you.
If the original creditor sent your account to collections by mistake, you can dispute the error with the credit bureaus. For example, if you’ve already paid the account in full, you can send a dispute letter with supporting documentation.
5. Too Many Accounts With Consumer Finance Companies
Consumer finance companies usually offer loans with high interest rates to consumers who can’t get other types of credit. For example, someone who can’t manage their credit card debt may turn to a consumer finance company for a payday loan.
Since consumer finance companies cater to people experiencing financial difficulties, traditional lenders are hesitant to approve applicants with multiple consumer finance entries on their credit reports. If you’ve been rejected for this reason, work to pay off as many of your consumer finance accounts as possible. Once they’re paid off, avoid opening more.
6. Proportion of Balances to Credit Limits
If you’re rejected due to a high proportion of balances to credit limits, your credit utilization ratio is too high. Your utilization ratio compares the amount of revolving debt you have with your total credit limit.
Here’s an example:
- You have three credit cards with limits of $500, $2,000 and $5,000. Your total credit limit is $7,500.
- You currently have balances totaling $2,500.
- Divide your total balance by your total credit limit. In this scenario, your utilization ratio is 33.3{e6a1e97ec1a15155ca0ed8c3e87721e561c99ed6e52274045963a20278fc2089}.
Generally, you should use no more than 30{e6a1e97ec1a15155ca0ed8c3e87721e561c99ed6e52274045963a20278fc2089} of your revolving credit limit at one time. If your ratio is higher than that, lenders may hesitate to approve your application.
One way to reduce your utilization is to reduce your amount of debt. In the previous scenario, you had balances totaling $2,500. If you had a total balance of just $1,000, your utilization ratio would be 13.3{e6a1e97ec1a15155ca0ed8c3e87721e561c99ed6e52274045963a20278fc2089}.
Another option is to increase your credit limits. If you had total balances of $2,500 against a total credit limit of $15,000, your utilization would be 16.7{e6a1e97ec1a15155ca0ed8c3e87721e561c99ed6e52274045963a20278fc2089} instead of 33.3{e6a1e97ec1a15155ca0ed8c3e87721e561c99ed6e52274045963a20278fc2089}.
Keep An Eye On Your Credit
It’s a myth that checking your own credit score can hurt your score. If you’re wondering what your score looks like or where your credit stands right now, you can always check your credit for free with Credit.com’s Credit Report Card.
