If you have never had a credit application rejected, consider yourself fortunate. Nearly 70% of credit applications are routinely denied by creditors across the nation for a wide variety of reasons. When a credit application is turned down, it is important for you to know why. Here are some of the most common reasons for credit application denials.
Ratio Of Credit Used To Credit Available Too High
If you are using a high percentage of your available credit, it may be a reason for a credit to deny your credit application. If your credit balances are more than 50% of your credit limits, it signals to lenders that you may be having trouble paying your existing debts, making them more reluctant to extend additional credit to you. To make yourself more attractive to lenders, focus on paying down balances that are close to the credit limits as quickly as possible.
Too Many Recent Inquiries
If your credit report has been pulled by lenders numerous times within a fairly short time period, it could be the reason for the denial of your credit application. The impact of inquiries on your credit will vary depending on your overall credit profile, but the typical inquiry will affect your score by about five points. Only certain types of inquiries are counted like this. Checking your own credit reports does not count; nor do promotional inquiries, inquiries from employer and insurance companies, and account reviews by your current creditors. Avoid opening large numbers of retail credit cards and limit your searches for additional credit to when it is absolutely necessary.
A large number of late or missed payments in your credit history will cause a drop in your credit score and cause most credit applications to be denied. Lenders want to lend to people that will pay back the amount borrowed plus the interest owed with a minimum of hassle. If you cannot demonstrate a good payment history, there is a good chance that you will not be able to get additional credit. Negative account information is generally listed on your credit report for seven years, and if the information is accurate, there is little chance that it will be removed from the report.
If you have a bankruptcy, judgment, tax lien, or collection account listed on your credit report, it could mean the automatic rejection of your credit application. Collection accounts may be reported on your credit report for seven years and 180 days from the date you first fell behind with the original creditor. Paid judgments and paid tax liens can be reported for seven years, but unpaid judgments and tax liens can remain on your report indefinitely. Paying a collection, judgment, or tax lien could result in the public-record item being removed from your credit history sooner and protect you from being sued for the unpaid debt.
Join our newsletter
Subscribe to get the latest "Engineer Your Finances" content via email.