A denied credit application can be shocking. Whether it’s a major purchase like an automobile or a smaller purchase such as furniture or appliances — a rejected application can blindside you.
While it’s always a good practice to get your free credit reports before you apply for credit, pulling your own credit may not help if you don’t know what’s hurting your credit.
5 Reasons For Denied Credit Applications
1. Late payment history
Lenders view a pattern of paying late as the way you manage your obligations. If you have several late payments on several different accounts, banks will not be confident in extending you new credit.
There may have been a legitimate reason for paying late; however, a new creditor will not have much confidence you’ll handle new credit differently.
If the late payments are older, they may not hurt your credit score as much.
2. Current credit accounts maxed out
Credit card balances that are maxed out to the limit indicate the possibility of default to lenders. Even if you’re managing payments on time, banks may view your potential to default as high because your balances are so high.
A quick fix would be to pay down your credit card balances to 10% or less of your available credit to see a boost.
An alternative option to consider if you do not have the cash to pay down the credit balances would be to request a higher credit limit. By increasing your credit limit you lower the credit utilization ratio — just don’t use the additional credit!
3. Recent charge-off on credit file
A recent charge-off is a huge red flag to banks. It’s an indication you may not pay your obligation if extended new credit.
An older charge-off may not affect your ability to get approved for new credit. Learn how to dispute charge-offs on credit reports.
4. Zero balance on credit cards
Banks like to evaluate how well you manage credit. That’s why having 0% utilization can trigger a denial rather than having a low utilization.
FICO scoring measures how well you manage debt, if you don’t have any debt, there’s little data to evaluate.
To ensure you don’t lose points for 0% utilization, it’s best to maintain at least a 2% utilization to indicate you’re managing credit responsibly.
5. Too many credit inquiries
The FICO credit model only scores hard inquiries occurring in the last 12 months. However, banks can see the last 24 months of inquiries and may hold too many inquiries against you.
Banks may view applicants with too many inquiries over a 24-month period negatively because each hard inquiry typically represents a new credit application.
Having high numbers of inquiries suggests that the applicant may be taking on too much debt or is in a difficult financial situation. However, different banks may interpret inquiries in several ways including:
- Number of inquiries: A few inquiries are usually not a major concern, but a large number (often more than six) can raise red flags.
- Timeframe: Inquiries made within a short period (e.g., a few weeks) for the same type of loan are often treated as a single inquiry by credit scoring models.
The exception to lots of inquiries is having a strong credit history with on-time payments and low debt; banks may still favorably view your credit history.
Request reconsideration when denied
If you’re denied, once you get the denial letter in the mail, call and request to speak to the underwriting department.
Ask for credit card reconsideration. During the reconsideration process be prepared to explain negative items on your credit report.
Loss of job, illness, lack of knowledge about high utilization are some reasonable explanations. What’s the worse that could happen? A manual review of your credit report may lead to an approval. Don’t give up!
Final thoughts
Denial of a credit application doesn’t mean the end of seeking new credit. Of the top 5 reasons a credit application can be denied, most of them can be remedied either through better managing credit utilization, on-time payments and paying down debt.
