Why Credit Applications are Denied

Concerned woman reading a credit card rejection letter.

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.

There are plenty of reasons why you may have been rejected, and some of those reasons may be completely out of your hands. But a credit or loan rejection is often a wake-up call that something about the way you manage money and use credit needs to change. By understanding why applications are rejected, you can work on ensuring that you get approved the next time around. 

Not enough credit history

One of the simplest reasons why a credit application might be denied is also the reason that might feel like it makes the least amount of sense.

If you don't have an established credit history - or simply not enough of an established history - you may be rejected outright or saddled with a high interest rate. Creditors feel the most comfortable with borrowers who've proven that they can handle their credit cards and loans. So if you've got little to no history with credit, they may consider you too risky.

A fair question, then, becomes, "Well how am I supposed to have a credit history if I'm getting denied credit for not having a credit history?" You've got a few options:

  • Use a secured credit card. This is a popular credit-starter, because it's incredibly low risk for creditors. You basically make a deposit (typically for a low amount like $200-$500) and that deposit serves as your credit limit. You use the card like a normal credit card, making purchases and then paying off your balance. The deposit is there as insurance in case you stop making payments. After a set period of time (usually six months to a year) the creditor returns the deposit and the card becomes a "normal" credit card, often with an increased credit limit.
  • Get added to someone else's credit card. You can start building your credit by piggybacking on someone else's established credit. Just keep in mind that any missteps you make will impact their credit, too. 

Recent missed payments

Payment history is the most important in pretty much every credit scoring model, so it stands to reason that missed payments can have a major impact on your credit applications. If you're missing payments that tells creditors that you're already having a hard time staying up on your financial obligations. That makes giving you a loan or new credit card very risky, hence the rejection.

The only antidote for missed payments is time. While missed payments won't fall off your report for seven years, the negative impact will diminish over time. If you manage to reestablish a recent history of making your payments on time, you should be able to overcome missed payments within a few years or sooner.

Too much debt

While having existing debt isn't automatically disqualifying for new credit applications, it can be the reason why you were rejected. There are two major red flags for creditors:

  • Your debt-to-income ratio is too high. It's okay to have a lot of debt, if you've got the income necessary to keep up with those payments. But if your debt payments keep climbing while your income stays the same, that's a potentially dangerous sign. If a creditor doesn't think you can afford to repay your existing debt, they're unlikely to extend you more credit.
  • You're too close to your credit limits. If you're using all of the credit available to you, that often means you're overextended. Creditors typically get nervous when borrowers start maxing out accounts, so if you're attempting to open a new account, be sure to pay down your existing debts first.

Inconsistent income

Creditors want to feel confident that any money they lend you can and will be repaid. The "will" is measured by your credit history. The "can" is measured by your income and employment history. The bigger the loan, the more a lender is going to want to see a steady and consistent source of income. 

This may be partially out of your control, but if you're approaching a major purchase, like a house or a car, you may want to wait on shifting careers until after the loan is approved.

Of course, there are other reasons why applications may be denied, including too many recent credit inquiries, unpaid tax liens, and errors in your credit report, among others. Fortunately, if you're rejected for credit, the lender is required to send you an explanation of why you were rejected. This should help you understand what you need to work on.

If your credit issues are tied to debt and missed payments, you may benefit from a debt management plan from MMI. It's a nonprofit debt solution with no credit requirements. See if it could work for you.

Tagged in Understanding your credit report, Build your credit score

Jesse Campbell is the Content Manager at MMI, focused on creating and delivering valuable educational materials that help families through everyday and extraordinary financial challenges.

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