So, youâve managed to get your credit score where you want it. You get that warm fuzzy feeling of achievement as you see the credit rating dial swing way into the green. But then you apply for a credit card, loan or finance and you get declined. âWhatâs going on?â Donât worry, Loqbox has the answer!
Having a âgoodâ or âexcellentâ credit score is also both good and excellent for your financial options and wellbeing. Showing lenders youâre creditworthy will often get you better rates and credit limits. But itâs not all they look at. If youâve been declined a credit card, loan or finance but your credit score is good (or even better!), here are five things that tend to give lenders cold feet.
Having good credit doesn’t necessarily guarantee that you’ll get approved for a loan. Here are some common reasons why you may struggle to get a loan, even with a good credit score.
Your Credit History is Too Short
Lenders like to see that you have a long track record of managing credit responsibly. If you have good credit but a short credit history, you may get turned down for a loan. For example if you’re young and have only had credit cards for a couple of years lenders may see you as risky even if your score is great. They want to see more data points over time to assess your creditworthiness.
Building up your credit history takes patience. Having long-standing accounts in good standing shows lenders that you can be trusted to repay debt over many years. Don’t open unnecessary accounts just to build history faster. Use credit responsibly over time, and your history length will grow.
You Have Limited Types of Credit
Lenders like to see experience managing different types of credit, like credit cards, auto loans, mortgages, etc. If you only have experience with one type of loan or credit line, you may get turned down when applying for something new. They want to confirm you can handle different credit products before approving you.
Try to build experience with 2-3 different credit types over time. Having an auto loan, mortgage, and credit card can strengthen your credit mix. Just take on new credit products sensibly – don’t bite off more than you can chew. Managing diverse credit types properly demonstrates to lenders that you’re a lower risk.
Your Income is Too Low
Even if your credit is great, lenders want to see that your income is sufficient to manage the new debt. If your income can’t support the loan repayment, you may get denied. Mortgages in particular require strict income thresholds, but other loans do as well.
Increasing your income through a promotion, new job, or side hustle can help strengthen your case. Lenders approve borrowers who they believe can actually afford the loan. If your income has risen since your last loan, be sure to provide updated documents to support that.
You Have High Debt-to-Income Ratio
Lenders calculate your debt-to-income (DTI) ratio, comparing your total monthly debt payments to your gross monthly income. If your DTI is too high, you may get denied for additional borrowing. Even if you’ve never missed a payment, too much existing debt compared to income is seen as risky.
Ideally, you want your DTI below 36%. Paying down credit cards, auto loans, and other debts can improve your DTI and chances of loan approval. Consolidating or refinancing high-interest debt at a lower rate can also free up monthly income for new loan payments.
You Have Lots of Credit Inquiries
When you apply for credit, the lender does a hard inquiry on your credit report. Too many inquiries in a short timeframe can negatively impact your score and make lenders cautious. It may look like you’re desperately seeking credit or overextending yourself.
Limit loan and credit card applications to 1 or 2 times per year. Also, check your report to ensure you didn’t get any unauthorized inquiries. Space out applications and give your score a chance to rebound from any dings that inquiries caused. Too many at once hurts your chances.
Your Credit Mix Shows Maxed Out Cards
Even if your overall credit utilization is low, maxing out one or more cards can sabotage your loan chances. Lenders see maxed out accounts as signals you may be overreliant on credit or have poorly managed your existing lines.
Ideally, you want your individual card balances below 30% of the credit limit. Paying down the maxed out cards to reasonable balances demonstrates that you’re able to manage credit wisely and aren’t overextended. Redistribution of debt across cards also helps.
You Have Recent Late Payments
Your overall payment history is a key factor in your score. Even one or two recent late payments can tank your credit and loan chances temporarily. Lenders see late payments as red flags, even if the rest of your history is positive.
If possible, bring any past due accounts current as soon as you can. Also, check for any errors on your report and dispute late payments that aren’t yours. Be vigilant about payments going forward. Keep long-term positive history to offset slip ups, and your score can rebound.
You Don’t Meet The Minimum Score Threshold
Each lender sets their own minimum credit score requirement for approval. For many standard loans, a good score is around 670 or higher. But for mortgages and other products, the thresholds may be much more stringent.
If your score falls below a lender’s requirement, you’ll automatically get denied. Improving your score and choosing lenders with more reasonable thresholds can help. Also be ready to provide additional documentation to prove your creditworthiness if your score is borderline.
Your Down Payment is Too Small
Lenders want to see you contributing enough money upfront and not financing 100% of the purchase. Large loans with little money down present higher risks for them. Even with great credit, low down payments can lead to denials.
Save up and be ready to put 10-20% down when seeking a mortgage or auto loan. Be prepared to provide documentation on your down payment funds – banks want that money to be legitimate. Bottom line is putting “skin in the game” makes approval much more likely.
You Aren’t Employed Stably
Lenders want confidence that you have steady income to repay the loan. If you change jobs frequently, are self-employed, work part-time or seasonally, or are unemployed, you may struggle to get approved even with good credit.
Having strong job history with the same employer is ideal. Provide documentation like recent pay stubs, tax returns, and bank statements to validate your income is consistent if you have unconventional employment. Length of time in your current job also influences lender decisions.
Your total existing debt compared to your income â
A high credit score suggests that potential lenders will view you as creditworthy. This makes the prospect of lending you credit, loans and financial products more attractive. But that could be true of a number of credit suitors and maybe youâve been wooed by their advances. Now your new beau is looking at your income and outgoings â which donât show on your credit score â and checking them against your existing debt. If your outgoings are quite high while your incomings are lower than theyâd like, it could look to them like youâve bitten off more than you can chew. In that case, the lender might think that you will struggle to make your repayments in the future and that actually you are more risky than your credit score suggests. Therefore, your application is declined despite your credit score being high.
Minor negative markers on your credit report â
If your credit score is âgoodâ or âexcellentâ the chances are youâve already sorted out any of the major negative markers on your credit report. These include things like county court judgments (CCJs) and bankruptcies. If you have any of those on your report your credit score will definitely know about it! However, there are more minor issues which donât impact your credit score but still affect a lenderâs decision. A minor negative marker could be something like a single late payment. Itâs not going to drag your credit score into the mud but it could still be a concern for a potential lender. All lenders have their own criteria for checking applications, so some will worry about these more than others. You could sail through with a few of them or get automatically declined for just one. Best bet? Check your credit score and iron out any kinks. Hereâs a list of things to do to get your credit score in the best shape possible.
3 Ways to Get a Loan with BAD CREDIT
FAQ
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