A denied credit application can be shocking if you were counting on making a purchase. 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 is always a good practice to get your credit report before you apply for credit, pulling your own credit may not help if you do not know what could be hurting your credit report. Below are 5 reasons you may have been denied credit.
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, a lender, bank or creditor 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 will 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 a possibility of default to lenders. Even if you are managing payments on time, lenders 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 30% or less of your available credit and your credit score will see an immediate 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 do not use the additional credit!
3. Recent Charge-Off on Credit File.
A recent charge-off is a huge red flag to lenders. It is an indication you may not pay your obligation to them if you are 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 your credit report.
4. Work History Too Short.
Lenders like to see a stable, long work history because it indicates an established method of cash flow. If you are new on the job, you may not get approved for credit because you do not have longevity in the workforce. Waiting at least 6 to 9 months may help you get approved if your work history is too short.
5. Too Many Credit Accounts.
This is different from number 2 “Credit Accounts Maxed Out.” Your credit accounts may not be maxed out but with “Too Many Credit Accounts” the potential for maxing out all of your credit accounts exists.
Let’s say you have 15 credit accounts with a grand total of their limits being $150,000. Not that you would ever max out each of your credit accounts but there is potential along with a real opportunity to do so.
Lenders consider the number of open credit accounts you have and their credit limits. It is true that higher limit credit cards can be a good sign to potential lenders; however, it can be an alarm if you are overextended and carry a balance on each of the accounts. Banks and credit card companies view repaying multiple credit accounts as high risk for default compared to repaying a few credit accounts.
You may not get approved if you have too many credit accounts — which leads to another reason your application may be denied.
Too many credit inquiries. Applying for too many credit cards and loans within a short period of time leads to excessive credit inquiries. While there’s no limit to the number of credit inquiries you can initiate, banks and lenders will take into consideration the number of inquiries on your credit reports. Seeking lots of new credit is a sign of risk that you may be in financial trouble.
Request a Reconsideration
If you are denied, once you get the letter in the mail, call and request to speak to the underwriting department and 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. Do not give up!
Denial of a credit application does not have to be 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, paying down debt, establishing a stable job history and credit repair.