The credit score: a number that can be an open door for some, but a locked gate for others. Having a good credit score gives your financial health a boost, making your other financial goals easier to obtain. People who have strong credit have access to better interest rates, higher chances for approvals on new credit, and other benefits. That’s what makes it all the more surprising when someone with good credit gets denied for a loan.
While a high credit score is an excellent marker of financial trustworthiness, it’s not the be-all and end-all. There are many other factors lenders consider before giving your loan the green light. If your application and credit history include some of these red flags, you may be rejected—even if your score is in great shape.
My Credit Score is Great, So Why Did I Get Rejected?
You Made a Mistake on Your Application
Sometimes, the reason behind a rejection can be as simple as an extra zero in your rent payment or forgetting to report a source of income! Request a copy of your application from the lender and review it for any errors that may have hurt your application.
You Have a High Debt-to-Income Ratio
Your debt-to-income (DTI) ratio is one of the key figures lenders consider when reviewing a loan application. Essentially, your DTI is calculated by taking your total monthly debt obligations and dividing that number by your total monthly income. Written as a percentage, DTI allows a lender to gauge whether you can comfortably take on new debt. If your DTI is low (less than 40%), you’re more likely to get approved. However, a high DTI (50% or higher) may disqualify you from getting the loan you want. From the perspective of a lender, a high DTI means you have plenty of debt on your plate already, and they may not want to risk your getting overwhelmed and not being able to pay them back.
Your Credit History is Short
It might seem a bit strange at first glance, but the newer you are to the world of credit, the less likely you are to get approved for loans—regardless of your credit score. In practice, however, it makes sense: lenders need to feel comfortable lending you money, and an established history with credit products and consistent payments shows them that you’re financially responsible. If you’re applying for your first or second loan, you don’t have as long of a track record with payments, meaning you’re more of a risk for the lender.
You Applied for Too Many Loans at Once
Applying for a loan means agreeing to a credit check from the issuer. This is called a “hard inquiry,” and it impacts your credit score. While it generally dings your score by just a few points, applying for multiple loans all at once means numerous hard inquiries. Too many of these inquiries look unfavorable to other lenders and may scare them away from approving you.
You Haven’t Checked Your Credit Report
Maintaining good financial health is just like maintaining good physical health: you need to establish—and sustain—good habits. If you relax your regimen and ditch the treadmill for a few months, you might be surprised (and out of breath!) when you get back in the gym. It’s the same thing with your credit score—while it’s easy to focus on just one or two good financial habits and assume that everything else will fall in line, neglecting to check your full report means potentially missing other issues like errors or forgotten collections accounts.
You Aren’t Looking at the Right Score
Did you know there are hundreds of ways to calculate your credit score? From the multiple versions of the FICO score to the increasingly popular VantageScore, it’s important to know what score lenders are considering when looking at your application.
However, most banks don’t give your application the green or red light using one of these generic scores. Instead, they have their own system to generate custom scores for each application. These lenders have a score cutoff—and if you’re one point below that cutoff, your application may be rejected regardless of how good your FICO or VantageScore is. The Consumer Financial Protection Bureau has some suggestions for finding out your credit scores for free—use this as a jumping-off point, but make sure you look at the big picture of your credit history as well before submitting an application.
You Don’t Have Liquid Assets
Lenders like to see that you’re using your money wisely, and that includes having some capital in a savings or money market account. They’ll also look at any assets you may have that you could quickly turn into cash. Your liquid assets reassure them that, even if a temporary hardship strikes, you’ll still be able to keep up with your payments. If you don’t have much in savings or assets, you’ll receive a higher interest rate at best and rejection at worst.
Your Loan Term is Long
Where do you see yourself in ten years? You may ask yourself that question every so often, but lenders ask that same question each time they review an application. Your financial circumstances are likely to stay the same over the course of a year or so, but ten or more years introduces uncertainty and change into the picture. Though many times these changes are for the best, sometimes they’re less than desirable and can hinder your ability to pay back a loan. That’s why lenders typically feel more comfortable with short-term loans, as you’re more likely to be able to pay back the loan without issue. Applying for a longer-term loan can mean a higher likelihood of rejection, regardless of your score, as a result of this potential uncertainty.
What Can I Do to Better My Chances for Next Time?
Find Out Exactly Why You Were Rejected
If you’ve received a rejection, you don’t have to remain in the dark as to why. According to the FTC, you have the right to know the specific, concrete reasons why your application was rejected. Knowing this information gives you the chance to discover exactly what you can change to qualify for the loan in the future.
Eliminate the Things that Hurt Your Application
A collections account, no matter how far in the past it was, can spook some lenders. Additionally, errors on your report can cause issues through no fault of your own. Take time after your rejection to research your best options to resolve any financial problems or inaccurate information. For example, some creditors are willing to remove collections from your credit report after the account is settled. Don’t be afraid to explore all your options—this can only help you!
Limit Your Hard Inquiries
Be careful not to apply for credit from a lot of different sources all at once. Not only does this cause multiple hits to your score, but it can also be interpreted by lenders as a sign of financial instability. Research lenders thoroughly before applying and explore your options with them before even putting your name on an application.
Keep Up Your Good Habits
Above everything else, stay positive and keep up the great work! You have a high score, which means you have some pretty great financial habits. Once you’ve turned some of your application’s red flags green, make sure you’re on your best behavior: no overspending and no opening or closing credit cards while your application is under review. Do your best to avoid significant financial changes during this time.
Bouncing back from a loan rejection can be difficult, but taking the time to fix issues and explore all of your options is the best thing you can do. That’s why Credit Direct makes it easy to apply online and check offers! All credit levels are welcome to apply, and our loan agents are there for you step of the way.