Having your application for a credit card or a loan denied can be a frustrating experience for both you and lenders. Banks and credit card issuers would much rather approve your applications because, of course, they exist to extend credit.
To that end, if you can figure out why a bank or credit card issuer denied your application for credit you may be able to correct the problem and reapply soon.
Credit applications are only denied for a few reasons. Some of them are actionable, meaning you can do something about them. Some denial reasons, however, are not as actionable. For those, you’ll have to wait until the cause of the denial has been removed or expired.
Here are five common reasons why you may receive a loan or credit card denial.
1. You Have Poor Credit Reports and Credit Scores
Your credit reports and credit scores are some of the most important factors a lender considers when you apply for financing. The condition of your credit helps businesses determine whether doing business with you is a wise investment or simply too risky.
You may find it difficult to qualify for certain types of financing if you’re struggling with any of the following credit-related issues:
- Low credit scores: Anything lower than 711 is below the national average
- Recent late payments
- Charged-off accounts
- Past-due accounts
- Too many recent inquiries
- A thin credit file (not enough credit history)
- Credit card balances that use too much of your available credit limits
Most banks have a minimum threshold that you’ll need to satisfy to qualify for a new account. This may include a minimum credit score and other requirements that pertain to your credit report (e.g., no prior bankruptcy, at least X years of credit history, no late payments in the last two years, etc.).
If your credit reports or scores do not satisfy a lender’s minimum qualification criteria, your application will be denied.
2. Your Debt-to-Income (DTI) Ratio Is Too High for the Amount of Money You Want to Borrow
Your credit scores and reports are not the only factors lenders consider when you ask to borrow their money. A lender will also want to investigate whether it believes you can afford the loan or credit card limit you’re requesting.
To determine your capacity (a.k.a. ability) to repay a new debt, a lender or credit card issuer will consider three important factors:
- How much money are you asking to borrow? With credit cards, this is the size of your credit limit.
- What is the amount of debt you already owe? Lenders generally answer this question by reviewing your credit reports and asking you to list your debt obligations on your credit applications.
- How much income do you earn? You will provide your income information on your credit card or loan application. Depending on the bank and the type of financing you’re seeking, you may need to supply proof of income as well.
By comparing the money that you must pay each month to service your existing debts to your gross monthly income (your income before taxes), a lender can calculate your debt-to-income ratio (DTI). Here’s an example of how the DTI calculation works.
Monthly Debt Payments: $3,000
Gross Monthly Income: $6,000
Debt ($3,000) ÷ Income ($6,000) = DTI (50%)
Lenders and card issuers have different DTI thresholds that they are willing to tolerate. Many prefer you to have a DTI of less than 35% to 36% to qualify for new financing. If your DTI is higher than a lender’s guidelines allow, your application will be denied because they are not confident that you can afford to take on the new debt obligation.
3. The Loan-to-Value (LTV) Ratio Is Too High
Here we go with another lending acronym.
Another factor lenders consider when you apply for a loan (not a credit card) is known as the loan-to-value (LTV) ratio. LTV compares the difference between the amount of money you want to borrow and the value of the asset that will secure the loan.
For example, let’s imagine you want to buy a new house and you need a mortgage loan. When you apply for the loan the lender is going to make sure that the collateral (the house) is worth enough to justify giving you the loan.
To calculate LTV, a lender divides the loan amount by the appraised value of the securing asset. So, if you are looking to borrow $300,000 to buy a house that appraises for $350,000, the LTV ratio is calculated as follows:
$300,000 ÷ $350,000 = 0.857 X 100 = 86% LTV
A lower LTV makes the loan less of a risk for the lender. Why? Because if you default on your loan and the lender must foreclose on your home (or repossess a car in an auto scenario), they want to be able to sell it and get as much of their money back as possible. A lower LTV ratio makes it easier for them to do so.
If the LTV ratio on the loan for which you’ve applied is too high, your application is unlikely to be approved.
4. You Previously Discharged Debt in Bankruptcy With the Creditor
Filing for bankruptcy can help protect you when you can’t afford to repay your debts. More specifically, bankruptcy protects you from your creditors.
For example, a Chapter 7 bankruptcy discharges all of your statutorily dischargeable debts, which means you won’t have to pay them. A Chapter 13 bankruptcy reorganizes your debts into a repayment plan you can afford while helping you keep your property (like your home and vehicle).
One of the downsides to filing bankruptcy, of course, is the negative impact it has on your credit score as bankruptcy can remain on your credit reports for up to a decade after the date you file. A bankruptcy can also make it difficult to qualify for new financing — especially soon after you’ve filed.
Yet, over time, it is possible to rebuild your credit after bankruptcy. As you do so, it should become easier to borrow money again in the future.
That’s the good news. But there’s a catch that many people don’t consider before they file bankruptcy. That is…lenders have great memories.
You may not be able to borrow money again from a creditor — ever — if you previously discharged your debt with that company in bankruptcy. Here’s an example.
Let’s say you borrowed $5,000 from ABC Bank. However, you couldn’t repay and you included that debt in a bankruptcy filing. ABC Bank never got paid, and, because of the bankruptcy, it was legally prevented from attempting to collect the debt. But a company caught up in a borrower’s bankruptcy proceedings doesn’t have to forgive and forget.
Fast forward a few years to a point after your bankruptcy is discharged, and you’ve worked hard to rebuild your credit. You may be able to qualify for loans with other lenders at this point, despite your past bankruptcy. Yet, ABC Bank may still deny your future loan applications because you borrowed money from the bank in the past and didn’t pay it back.
This isn’t a credit-killer, by any means. There are thousands of lenders in this country, so you’ll have plenty of other options when it comes time to apply.
5. You Already Have a Card With the Issuer
Sometimes the reason you’re denied a credit card has nothing to do with your income, debts, or your credit scores. You could have great credit and a low DTI ratio yet still have a credit card application denied.
One reason why this may occur is that you already have one (or several) other cards from that same company. Depending on card issuer guidelines and the total credit limits a card issuer has extended to you, a bank may not feel comfortable giving you the opportunity to borrow more money. That’s not a credit-based denial but is, instead, a policy decision on their part.
Keep in mind that many card issuers will allow you to open multiple accounts under the same company umbrella. For example, it’s not uncommon for someone to have multiple Chase credit cards in their wallet or multiple American Express-branded cards.
It’s a good idea, however, to look at a card issuer’s terms before you apply for a new account. If you already have other credit cards with that company, pay attention to its restrictions in advance.
It may also be a wise use of your time to simply pick up the phone, call the card issuer, and ask if it is open to issuing another card to the same consumer. If the issuer says no, then at least you avoided adding a credit inquiry to one of your credit reports.
Improving the Odds
Getting turned down for a credit card account or loan is never a good feeling. Yet if you make an effort to uncover why your application was denied, it could help you.
In addition to reviewing the potential reasons for denial above, you may want to talk to the card issuer or lender directly. With a card issuer, in particular, you can call the reconsideration line to get more information and see if there’s a chance to change your application’s outcome.
Again, lenders and card issuers are in the business of…issuing loans and credit! It’s what they do and why they exist. They want to say yes.