5 Reasons You Can Be Denied a Loan or Credit Card
If you've been turned down for a loan or a credit card, you may be wondering why. While these seem like different financial needs, both of them rely to a certain extent on providing credit. What you should know is that having your application denied doesn't necessarily mean you can't still get a loan or credit card. Companies and banks have to meet certain qualifications for approving. While you may have to adjust your situation to meet their threshold or apply for a different loan or credit card, you often can qualify over time.
If you're not sure why your application was denied, these are the most common reasons.
Bad Credit History
This is probably the most common reason why you may be denies a loan or credit card. Credit history is the one factor that companies consider most. Your credit history tells a lender or company how likely you are to not be able to pay. If you've had difficulty paying in the past, then you may have some poor credit in your past. Collections, bankruptcy, and past due accounts all have a negative effect on your credit history. You can check your credit score online and see your current score. Your lender or credit card company may also tell you what your score is and how it compares to their minimum requirements. This can provide you with an idea of your current standings and how to make changes before re-applying.
High Income to Debt Ratio
Even if you have a good credit history and always make your payments on time, you may have a loan or credit card application denied if you have too much debt. This ratio is the sum of all your debts divided by your monthly income. Take all the payments that you have to make including your credit cards, auto loans, student loans, and any other debts and add them up to determine how much debt you have to pay each month. Then divide this number by your monthly income.
A low DTI signals to companies that you have a healthy balance. The ideal ratio is less than 40% so if yours is higher than this, you may be denied funding. However, if you are denied, paying down your debt will drop the ratio and improve y our chances of getting a card or loan in the future. You can work on this if possible.
Unstable Employment History
This is probably not as much of a factor for credit card approval, but lenders often want to know that you have a steady source of income. They want to know that you can hold a job and will have money coming in to pay back any loans that you take. This means that if you have different pay stubs or have changed jobs in the past two months, or even have freelance work from several employers, this can be a warning sign to them.
If your income fluctuates by your being self-employed or you do seasonal work, that doesn't mean that your application will necessarily be declined. Your paychecks aren't always going to be consistent or predictable but if you can show your past tax returns, your lender may be able to calculate an average income and use this to approve your loan. However, if your income is too sporadic or you've had multiple jobs recently, you may not qualify. It may be better to try and wait until you've had a job for a few months to apply for a loan or credit card.
Limited Credit History
Unfortunately, it can be hard to get your first credit card. If you've been used to paying for items with cash or a debit card, you may feel as though you've made the smart financial decision. However, having a credit card is a way to build up a credit history. Any type of debt or loans such as student loans, car payments, and house payments all build up a credit history. Even renting an apartment and paying your rent on time contributes to a healthy credit history.
It's common for people to be denied for a loan or credit card if they don't have much credit card history. This being said, that doesn't mean you can't get any type of card or loan. Talking to your bank or applying for cards that cater to people who have limited credit will help you to build up your credit history and you can re-apply in the future.
Minimum Income Not Met
In addition to needing some type of fairly stable income, lenders and companies also want to know how much you make. This means that you will be able to repay what you borrow. If your income is below the threshold for the lender or the company, you may be denied or offered a loan with a lower amount. The same holds true for a credit card. Some cards will still approve you but set a lower credit limit, so you won't be able to use them for all of your purchases.
If you want to ensure that your lender or company gets an accurate picture of what you actually make, ensure that you include all sources of income in your application. This will include income that you make from side jobs, investment accounts, and even child support payments if needed. Once considering how much cash you actually have coming in every month, a company may decide to give you a loan or credit card for the amount that you want.
Applying for a Card and Loan
With most of these problems, it is possible to find alternatives to get the card or loan that you need. Many lenders and companies are willing to work with people to help them rebuild credit and be approved in the future. This may be more difficult if you need a card or loan right away. However, focusing on improving your financial situation will help you in the future so make sure that you review any reasons why you were denied.