rejected Loan or New Credit ApplicationIf you’ve ever submitted a loan or new credit application, there’s a possibility that your application was denied. Worse yet, you may not entirely understand (or know) the reason for your rejection. Failure to get approval from a lender can be demoralizing, especially since creditworthiness is an important aspect of financial health in today’s world, affecting everything from what credit cards you can get to your love life. However, it’s important to remember that approval for new credit is not solely about your credit scores; there are a number of reasons why someone might be denied by a lender. The good news is that once you identify these reasons, you can usually correct the problem and improve your chances of getting your next application approved. Below, we detail the actions you should take once your application is declined and discuss some of the common reasons lenders reject applicants and what you need to know to help prevent it from happening to you.

What should you do if your application is rejected?

If your loan or credit application is rejected, keep in mind that under the Equal Credit Opportunity Act (ECOA) you have rights that entitle you to make specific requests from the lender who rejected you. First, you can request to know the reason why you were denied, as well as the credit score and credit reporting company used to generate the score. From there you can contact the credit reporting company to receive a free copy of the credit report that was used by the lender. If the lender doesn’t give you any information as to why you were denied, it’s important to know that you have 60 days after you receive notification to ask. Also, remember that credit discrimination is illegal, which means that there are certain factors – such as age, race and public assistance – which cannot be used to determine whether or not you qualify for a loan or credit.

What can you do once you find out why your application was rejected? Keep reading to learn how to overcome the most common reasons for loan or new credit application denial.

Why your application was denied

There are a number of reasons why your application was declined, but here are some of the most common ones.

Reason 1: Insufficient documentation or application mistakes

Sometimes you might have simply missed something on your application. While this might not seem like a big issue, either failing to submit all necessary paperwork or filling out the application incorrectly could jeopardize the approval process. If you’re rejected for this reason, it’s possible the lender will inform you and allow you to resubmit your application with the correct information and paperwork. As a precaution, you should also keep a record of any applications you submit so you can verify whether any application mistakes originated on your end or were the fault of another party. Before submitting an application, it’s also prudent to go over the requirements and documentation one last time to be sure you haven’t made any mistakes.

Reason 2: Bad Payment history and other derogatory marks

A bad credit history is one of the more obvious reasons for rejection, but it can be somewhat ambiguous to the average consumer what factors influence this area of their credit profile. For most lenders, your payment history is key – late payments, skipped payments and similar behaviors all reduce your trustworthiness. In addition, derogatory marks on your credit reports, like old debts – especially those that were in collections at some point – or an excessive number of hard credit inquiries look bad. Before applying to borrow from any lender, you’ll want to take a good look at your credit reports. Even if you know you’re current with all of your accounts, there’s a possibility there could be errors on one or more of your credit reports that should be disputed and removed, which can improve your creditworthiness overall. Not dealing with errors? You can also make efforts to reach out to creditors and pay off outstanding debts and boost your credit.

Reason 3: Too much outstanding credit or loan debt

Lenders use metrics like your credit utilization ratio and debt-to-income ratio to judge how much you can borrow while being an acceptable risk. What exactly are they? In simple terms, your credit utilization ratio is essentially an assessment of how much credit you have available (your credit limit) and how much credit you’re currently using. Creditors prefer to see this ratio under 35%, so the higher your credit utilization ratio is, the more negative impact on your credit you might see. This metric is predominately used by credit lenders, while loan lenders tend to use the debt-to-income ratio which, as the name implies, assesses how much debt you have in relation to how much money you make to try and assess whether you can reasonably afford to make monthly loan payments. If you’re applying for a credit card or line of credit and already have access to a lot of credit or you’re applying for a loan while carrying a lot of debt, you will want to take these factors into consideration – as any creditor certainly will. High credit utilization or a high debt-to-income ratio are unfavorable and could prevent you from approval.

Reason 4: Limited income and/or job history

As stated above, your income is used to assess your eligibility for both loan and credit applications. While approval for credit cards and lines of credit might not require you to meet explicit income qualifications, such applications will still use income as a means of gauging what you can afford to pay. Loan eligibility involves some of the same factors, like employment history, in addition to more concrete financial metrics like the debt-to-income ratio concept mentioned above. With regards to your employment history, in many cases if your job is considered too recent, or you’re unemployed, you’ll be seen as a risk because it’s not apparent to the lender how consistently you’ll be able make payments.

Reason 5: Too many recently closed credit accounts

If you’ve recently terminated any credit card accounts or lines of credit, in most cases your credit utilization ratio will be negatively impacted. This is especially true if you close out accounts with high credit limits or your active accounts have high balances on them, as we detailed in this blog post. Your best option for preventing this scenario is to avoid opening an excessive number of credit accounts in the first place. However, if you must close an account, avoid doing it too close to potential credit inquiries, either from lenders or from others who will look at your credit (e.g., landlords or employers) — best yet, do it after you’ve been approved by that creditor, landlord or employer. Paying off most of your other account balances before closing one of them can also help.

Reason 6: Too many new credit accounts or inquiries

On the flipside, opening new credit accounts can negatively affect your credit scores, especially if you have more than one new credit account open at any given time, with “new” generally referring to accounts opened within six to 12 months. Requests for new credit cards or credit lines will also result in hard inquiries no matter whether you are approved or not. The effects of multiple hard inquiries and new credit accounts stack, and cause your credit scores to take a double hit. FICO considers both an increase in credit inquiries and an increase in newly open credit accounts as separate risks factors when calculating the 10% of your credit scores that accounts for “new credit.” Accessing your credit reports prior to applying for a loan or new credit can help you ensure that this won’t be a problem – and you should also know that the longer and healthier your credit history is, the less impact these types of marks will have on your eligibility to borrow. If you are careful about how frequently you apply for new credit, you shouldn’t have too many problems in this area.

Getting rejected from a loan or credit application you were hoping to get might not feel great, but the good news is, you can usually rectify the problem(s) and try again. If you want to learn more about building and maintaining healthy credit, read our credit monitoring and credit repair blogs where we go into detail about managing your credit and tackling common credit issues.