One of the advantages of having a strong credit score is that it often makes other financial milestones easier to attain. People with excellent credit are usually eligible for better rates on loans, and they typically have better chances of being approved for important loans like a mortgage.
That makes it all the more surprising when an unexpected rejection arrives.
While a good credit score definitely helps you get approved for loans, it’s not a magic key. Even someone with an excellent score can be turned down for a new loan.
Resist the urge to rip the rejection letter into tiny pieces. You’ll need it to understand what other factors weighed into the lender’s decision, and how to respond.
How Can I Get Rejected With a Good Credit Score?
When you apply for a mortgage, a bank loan to open a small business, or a new credit card, you’re asking for access to more money than you can comfortably spend independently. Lenders need to feel confident that you’ll be able to pay back what you owe, and that you can be trusted to do so.
A high credit score is certainly one indicator of financial trustworthiness, but it’s not the only factor under consideration. If your application has one or more of these common warning flags, you could be rejected even if your credit score is excellent:
- Brief credit history. Length of credit history is an important part of your creditworthiness. Lenders need to see that you have an established history with credit products. Keep up responsible habits (pay your bills on time and keep your debt low), and time will help your score reach its full potential.
- Change in income or low bank account. The dollar figure on your paycheck doesn’t affect your credit score. It does, however, affect your eligibility for certain new credit accounts, including a mortgage, car loan, or even a credit card. If your income changes, is too low, or if your bank balance doesn’t support the level of assets the lender requires, your application could get rejected.
- High debt-to-income ratio. The debt-to-income ratio is the percentage of your income that is spent on required debt payments. A high DTI is a major red flag for lenders, and it’s a factor that may not be in line with your credit score at all. For instance, you could have excellent credit habits, with no late payments at all on your credit history, and no outstanding credit card debt at all. But if you pay $1,000 per month for rent and $300 per month each for your student loan and your car payment, all on a $40,000 salary… you’ve got a 48% debt-to-income ratio and that could disqualify you from the loan you want. Lenders may be worried that you’ve already got as much debt as you can handle.
- Recent late payments or collections account. Imagine you’ve paid your credit card bills on time for years, gradually building a strong credit score. Then, for whatever reason, you suddenly miss a few payments. Unfortunately, those late payments hurt you more than they hurt consumers who had poor credit to start with. Your credit score probably took a nose dive. The higher it the score, the harder it falls when a serious derogatory event shows up in your file.
It’s a good idea to check in periodically on your credit score. Calculating scores is a complex process. Credit history, prompt payments, credit utilization, and other factors affect the final number. It can be easy to focus on one of your good habits and assume that your credit score must be high, when in reality there may be issues affecting your score. A 5-year-old collections account you’ve long forgotten could still have a serious impact on your score.
It’s also possible that there are errors on your account. Data for a person with the same name, or whose social security number is similar to yours can end up in your file. In that case, your score could be suffering through no fault of your own. Find the errors and dispute them.
How credit scores are calculated also changes from time to time. For example, VantageScore is updating its algorithm later this year. The new system’s approach to trended data will, in general, look more favorably on people who are paying down debt compared to those whose debt increases or who only make minimum payments, even if those payments are on time.
The new system may also evaluate large credit limits as a bad sign, since a borrower could theoretically incur a lot of debt quickly. People with high credit scores stand to see the biggest impact. If a lender evaluates your credit using a new system, you may be surprised at the result.
Credit Hacks That Backfire
Credit hacks are easy to find. Unfortunately, some supposed money-saving tips can backfire and make it even harder to get your application approved.
Mistake #1: credit card churning. This is when a consumer signs up for multiple credit cards with attractive introductory offers, keeping each card just long enough to take advantage of extra rewards points before canceling it and starting the cycle all over again. This practice sends alarm bells. A credit card issuer that suspects a churner may deny your application.
Mistake #2: bad timing. When you apply for a new credit card, the issuer runs a credit check that you authorize as part of your application. This check, known as a hard inquiry, impacts your credit score. Generally, the hard inquiry itself only dings your score by a few points. The bigger issue is that too many of these inquiries, especially at the wrong time, looks bad to other lenders. Some credit card issuers deny any applicant who has applied too many times to the same bank in a certain time period. If you’re hoping to get approved for a mortgage, the lender probably has a limit on the number of inquiries you can have made in the last six to twelve months. Consider your future credit needs before you apply.
Mistake #3: charging for points. Watch how much you charge to your credit cards. Make the most out of points and cash back rewards, but don’t buy just for points. High credit utilization (the percentage of available credit you actually use each month) can indicate that you’re a risky person to lend money to. If you need to rely on credit so heavily, the argument goes, you may struggle to come up with day-to-day funds.
Charging less will lower your credit card utilization. Changing how you pay your balance may also help. Your utilization is based on the balance owed when it is reported (usually on or right around your statement closing date). Schedule partial payments throughout the month to keep the balance down. Even if you’re charging the same amount to the card, multiple payments means less opportunity for the balance to creep high enough to worry a lender.
Steps to Take If You’re Rejected
Getting denied for a credit card, mortgage, or other loan is frustrating and disappointing. The good news is that rejection might not necessarily be the final word. You can take steps to get your application reconsidered.
1. Find out why you were rejected. You have the right to learn the specific reasons why your application was rejected. According to the FTC, a lender must either provide you with the reason behind your rejection, or inform you that you have the right to ask within a certain time period (usually 30 or 60 days). Failure to meet “minimum standards” is not an accepted reason; the lender must give you a more concrete reason.
Admittedly, it’s not fun to read through a list of reasons why you didn’t meet a lender’s requirements. Keep in mind that this rejection wasn’t personal. View the information as your chance to discover what you may be able to change to qualify for that loan or card you need.
2. Look for errors in your application. If the reason a lender provides doesn’t make sense to you, make sure a simple error didn’t throw off your application. Double-check that you haven’t forgotten to report a source of income or accidentally added a zero to your rent payment.
3. Check your credit report. Unlike the hard inquiry that occurs when a lender runs a credit check, reviewing your own credit is a soft inquiry and it doesn’t hurt your credit score. You’re entitled by law to get a free credit report from all three major credit bureaus every 12 months (visit annualcreditreport.com). You can also use Credit Sesame to view your free credit report card, and this is also a soft inquiry that won’t hurt your score. Dispute any inaccurate information you find.
4. Eliminate issues that hurt your application. A collections account may scare some lenders away. Research your best options to resolve any financial problems that could be red flags. Some creditors are willing to remove collections from your credit file after the account is resolved.
5. Request reconsideration. Let’s say you’ve discovered an error in your file or application that you can correct, or you suspect you just barely missed the mark to qualify for a loan. Call the lender to discuss your case. Context might change the lender’s mind. Of course, it might not. Go in with clear points to present, don’t beg the lender to reconsider, and accept their response.
These steps might help you convince a lender to reverse their decision and approve your application, but they’re certainly no guarantee. Even if the lender says their decision is final, you’re not out of options.
What to do if your reconsideration request doesn’t work
Another lender may take a more favorable approach toward your application. If your top choice credit card denies you, compare other credit cards for similar benefits. Contact another bank for a loan or visit houses in a different neighborhood.
You may also need to adjust your own expectations. Look for a smaller house or apply for a less “elite” credit card.
In some cases, you’ll need to wait. Paying off a loan or scoring a raise could improve your standing with lenders.
Stay positive, and keep up the good habits that led to your strong credit score. Pay your bills on time and use your budget wisely to avoid debt. Once you’re in a better place to reapply, make sure you’re on your best spending and credit behavior. Don’t open or close credit cards or make big financial changes while your application is under consideration.
Hopefully, the work you’ve done to maintain your strong credit and build a better application in other areas of your financial life will result in the “Approved” letter you’ve been hoping for.