Credit Repair

Why You Were Rejected Even With Excellent Credit

Even if you’ve never missed a payment in your life, you could still get rejected for a line of credit or loan you thought would be a slam dunk. Although having an excellent credit score is important to lenders, there are other variables that could explain their reluctance to approve your application.

5 reasons why you might get rejected

While income and employment status may not directly affect your credit score, these and other variables can provide important clues as to why your application for credit could get rejected. Here are five possible reasons you may not have considered:

1. Your debt-to-income ratio is too high

Even if you only earn minimum wage, you could still rack up an excellent credit score if you have a long history of using credit responsibly and keeping your balances low. That’s because your income doesn’t directly affect your credit score, said Logan Allec, the Los Angeles-based author of finance blog Money Done Right.

But you can still be denied a mortgage if your income is too low relative to the amount of debt you are carrying. For lenders to feel comfortable giving you a loan, they generally want to see a debt-to-income (DTI) ratio below 43%. This ratio is calculated by adding all your monthly payments and dividing them by your gross monthly income. Lenders want to be assured that you will not have to struggle to make your mortgage payments every month.

“Boosting your monthly income is a good way to decrease your DTI and help qualify for a mortgage,” Allec said.

2. Your employment status has recently changed

Have you done something recently that a lender might view as risky, like quit your job to become self-employed full time? Even if you’re able to make your monthly payments and your credit score has been unaffected, lenders may still proceed with caution.

They may see your new venture as a risk when compared with a stable employment history, especially if it has been in existence for less than a year and is therefore an unproven endeavor.

To qualify for the loan you want, Allec suggested waiting for more time to pass.

“You will have better chances of getting approved if you can show a history of success with self-employment income and report it on at least one tax return,” he said.

3. Your credit score is not as high as you thought

Make sure to check each of your credit scores from the three major credit bureaus: Equifax, Experian and TransUnion.

If you only check your credit score with one of these bureaus, you might not be getting the full picture. The other bureaus could have assigned you a credit score that is much lower or higher than what you have been seeing.

One reason your credit could be negatively affected is from having too many hard inquiries in a short period of time.

“Plan ahead before applying for a loan or refinance, and only open new credit accounts when you absolutely need to,” Allec said.

4. You’re behind on child support payments

Regardless of how high your credit score might be, lenders will often consider delinquent child support payments when evaluating your application for credit. More than 11 million people with arrears in child support payments are reported to all three credit agencies every year. It’s not unusual for lenders to require that late child support payments be paid in full as a condition for qualifying for the loan.

5. There’s an error on one of your credit reports

It only takes one small mistake to derail your application. According to a Federal Trade Commission study, about 26% of Americans identified at least one error on their credit report that could make them appear riskier to lenders. Check for common clerical errors, old bad debts that should have been removed and anything that could potentially be related to identity theft. Left unchecked, these mistakes can affect your ability to get loans, new lines of credits or affordable interest rates. If you find you still need help with your credit report, you could consult a credit repair agency.

How to boost your credit score even further

While getting rejected is always a shock, especially when you thought your financial health was under control, here are a few tips to boost your credit score even higher:

Set up autopay on all of your credit accounts. Payment history accounts for a whopping 35% of your credit score. Setting up automatic payments is the easiest way to ensure that no bills fall through the cracks and your payment history remains good, without having to think about it. “Just make sure you have the money in your account to pay your bills,” Allec said.

Keep your combined balance below 30%. Your credit utilization rate — the ratio of your credit balance to your total credit limit — accounts for 30% of your credit score. So make sure not to keep too much of a balance on any one card, and keep your combined credit balances below 30% of your total limit. But if you want to do even better, pay off your balances in full every month.

Think twice before closing a credit card account with a high limit. Cutting up a credit card might not necessarily boost your credit score. In fact, it could make your total utilization rate skyrocket, which would have the opposite effect. Instead, if your reason for wanting to cancel a credit card is its high annual fee, “call the credit card company to see if they will waive it for the year,” Allec said.

Don’t close your oldest credit account. Your length of credit history makes up 15% of your credit score, so the older your accounts, the better. If you have an old card you don’t want to use anymore, don’t cancel it. Just put it in a drawer or cut it up. Even a dormant credit account can help boost your credit score as it ages.

Don’t open too many new accounts. The number of loan applications, credit pulls and new credit accounts you’ve had in the past 12 months account for 10% of your credit score. The higher the number, the more it will work against you.

Mix it up. Your credit mix is the variety of accounts that appears on your credit report, and it makes up 10% of your score. The idea is that experience managing different kinds of credit — a car loan, a mortgage, a few credit cards — is a sign of a responsible borrower. Keep this in mind when applying for new loans or credit.

“If you don’t have any installment loans but want to buy a new car, consider financing your purchase with a low-interest auto loan, assuming one is available to you,” Allec said. “However, if you are looking at obtaining a mortgage or refinance in the next year, I would not recommend this.”

Bottom line

Even though you may already be in excellent financial shape, there is probably still room for improvement. Make sure to consider variables that have an indirect but significant impact on the approval of your credit application, such as income and employment history. Whether your long-term goals include buying a new house or saving thousands of dollars through refinancing an existing mortgage, make sure whatever financial decisions you make move you closer to achieving them.

 

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