If you have ever been denied credit, you might believe that lenders are not upfront about your reasons for denial. A lender must provide written notification when you are denied credit, and that notice must either provide the primary reasons for the denial, or advise you where you can mail in for those reasons. They must provide you a credit score and advise what the major forces are behind that score. Why are some denied credit when they have a seemingly stellar credit report…no late payments, no bankruptcies, etc? While there is no cut and dry answer to this question, there is an explanation as to what lenders may consider a “red flag” or a reason for denial or an offer of credit with unfavorable credit terms.
Excessive Credit Balances
First, lenders are quick to deny consumers with excessive balances. Lenders want to lend credit to consumers who have available credit. Lenders are fearful of consumers that fail to pay off their balances. In other words, if you are already over extending yourself, why would you be able to pay off any additional debt? In order to determine whether or not you are carrying too much debt, lenders look to your credit utilization ratio. This ratio is a number that represents the percentage of your available credit. A favorable credit utilization ratio is around 30%. Any percentage larger than this may raise a red flag to potential lenders and be a reason for denial.
Recent Collection Accounts
The second reason for denial is delinquent or recent collection accounts. These types of accounts are clear red flags for credit card companies. Experts say the most important factor on your credit report is timely payments. Making your payments on time is important to a lender who is considering lending you money. Failure to pay is discouraging to a lender who is considering your application.
Third, watch out for over applying. If you are looking to open a new line of credit or get a new credit card, limit the amount of companies you submit an application to. Too many applications can cause lenders to wonder why you are shopping around. Too many credit inquiries is a red flag to lenders and may mean you are in financial trouble or are looking to spend a large amount of money. Lenders want to ensure they are paid back and if lending you credit means they are put on a long list of those you owe, they are more than likely to say no.
Limited Credit History
Another reason for a denial is a limited credit history. Not having enough information on your credit report can harm your chances of approval. An inexperienced consumer may raise a red flag to lenders because you may not know how to manage your finances. Additionally, credit scoring companies cannot generate a credit score unless the consumer has an active credit history in the six months prior. If you don’t have a credit score, a lender has nothing to base his or her decision on. Some creditors will look to see that you have history of that type of credit. A credit card company may want to see that you have had revolving accounts before. An auto lender may like to see that you have handled installment accounts successfully.
If you are in need of additional information about your credit report or believe your rights have been violated under the Fair Credit Reporting Act, contact SmithMarco P.C. for a completely free case review.