Have you ever filled out an application for a credit card or a loan, only to be denied? Even if you've used credit in the past, you can still be rejected when applying for loans or credit cards. Experiencing such a rejection should serve as a wake-up call that something about the way you manage money and use credit may need to change. That’s why it’s important to understand why your credit application may have been turned down.
Fitting the profile
Credit decisions are rarely made by an actual person these days. Just this week, I submitted a request to have the credit limit increased on one of my cards. The process was completely automated and took about two minutes.
These decisions are primarily made by algorithms – complex equations used by creditors to weigh risks (the possibility of you not paying back the money you borrow) against rewards (the amount of money the creditor stands to gain in fees and interest from extending you credit). There’s rarely any human judgment involved in the process. Creditors set the criteria for certain products and certain rates. If you meet the criteria, you’re usually in. If you don’t meet the criteria, you may be limited to credit products with less favorable terms (higher fees, higher interest rates, etc.).
What’s your score?
This assessment almost always includes a review of all the information contained in your credit report, including your payment history, the amount you owe, who you owe, the length of your credit history, and how recently you may have opened any new credit accounts.
These factors may be weighed slightly differently depending on the credit scoring system being used by the creditor. In the FICO scoring system, for example, your payment history accounts for 35 percent of your score, the amount you owe is 30 percent, the length of your credit history makes up 15 percent, new credit is 10 percent, and your credit mix (credit cards, store cards, loans, etc.) is 10 percent of your score.
The number of times you apply for credit and the frequency of your attempts to get credit are also taken into consideration. Applying for multiple loans and cards in rapid succession can make you seem risky and reduce your score temporarily.
Missing the mark
So right off the bat, you may not qualify for a loan or credit card simply because your credit score is too low to meet the requirements. That, of course, can be corrected over time by simply using credit wisely, making timely payments, and keeping your balances low (or carrying no balance at all, if you can manage it).
A creditor may also deny your loan request because you have not held your present job or lived at your present address long enough. Your salary may also not be high enough to meet the requirements for the credit card or loan product. Some lenders are interested in the reason you are requesting the loan to determine if the request is reasonable.
Whatever the reason, if your application for credit is denied, the lender or creditor in question is required to send you a notification in the mail detailing why the application was rejected. Once you know the reason, you can take active steps to address the problem. Make sure you don’t risk another rejection by simply applying again right away.
Additionally, it’s also possible that your credit report may contain incorrect information. Whenever you are refused credit, you have the right to receive a free copy of your credit report within 30 days of the rejection. Take advantage of this opportunity to check your credit report and determine if there are any mistakes.