February 1, 2024

What should I do if I’m denied credit?

Being denied credit can be a sign of a larger debt problem. Learn how to find answers and improve your relationship with debt here.

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What should I do if I'm denied credit?

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Being denied credit can sometimes be a shock and is often the first sign of debt trouble. It leads some people to smartly reassess their need for new credit and focus instead on improving their finances. But it leads other people to panic and hastily reapply for credit from other sources, like third-party lenders. This will can make matters worse.  

 Before you take any action, you should first find out why you were denied and what other options you have. Keep reading to find out how to navigate these steps. 

Why credit applications get rejected

 Whether you’re applying for a credit card, mortgage, auto loan or personal loan, the lender or creditor will ask for access to your credit report to determine how likely you are to make monthly payments. A low score tells the creditor that you pose a greater default risk, which increases the interest rate. But if your score is too low, the creditor or lender will deny you credit entirely.

Before you start reapplying for credit or even seeking out new options for credit, order and review a copy of your credit report from either Equifax or TransUnion (you can ask the creditor which one they used). Your credit score will not be penalised for ordering your own credit report.

If the creditor hasn’t given you a written explanation for why they denied you credit, you can also ask them to justify their decision. If they’re a credible company, they’ll tell you.

 What factors contribute to being denied credit?

 1. Too many late or missed payments

This may not be a problem if it was a while ago and you’ve since stabilized your finances. But if it was recent or consistent over a longer period, lenders will worry their loans won’t be paid back on time or not at all. A delinquent loan sent to collections will stay on your credit report for six years and be a major contributor to denied credit.

 2. You have too much debt

 A lender will determine if you have too much debt by looking at your credit usage (total credit vs. available credit). Creditors like to see you use less than 30% of your available credit, and will see overextension as a risk factor. It will show them you either struggle with debt management or don’t pay attention to finances. 

Carrying a high balance for a short period of time won’t hurt your score too much, but lower utilization shows you aren’t overly reliant on credit.

If you have too much debt and are unable to qualify for a debt consolidation loan, it’s time to ask for help. A Licensed Insolvency Trustee (LIT) can help you explore your debt relief options free of charge. 

Been denied credit?

3. Low overall credit score

Your credit score is an overall reflection of your ability to handle loans and credit, and breaks down this way:

  • 760-900 is excellent
  • 725-759 is very good
  • 660-724 is good
  • 560-659 is weak
  • 0-559 is poor

While every lender will have their own benchmarks, a 660 score is seen as a good line to stay above. A lower score will explain why lenders are denying your credit applications.  

4. Unstable income 

Creditors want to approve people they think will consistently make payments. If you have a stable job, this shouldn’t be an issue, but if you work freelance or on commission, they may require further proof of a stable income, like an income tax notice of assessment. 

Your employment history is included on your credit report and will be seen when a creditor pulls a hard report. 

5. Not enough credit history 

If you’re new to credit and borrowing money, your report may not have enough information to properly assess your risk. It shouldn’t take too long to start building that history, but certain types of credit may temporarily be unavailable. 

One of the best ways to start building your credit history is to get a secured credit card. A secured credit card is like any other credit card except you need to provide a cash deposit upfront. Learn more about secured credit cards.  

6. A high debt-to-income ratio  

Your debt-to-income ratio is the total amount of debt payments you owe every month, divided by the total amount of money you earn each month.

If you owe $500 each month and make $2,000, then your debt-to-income ratio is 25%.

In this case, it means you are spending 25% of your monthly income on debt payments. The highest you want this percentage to be is 30%.

The higher the percentage, the riskier you are to loan money to. For most lenders, 43% is the maximum debt-to-income ratio someone can have to be approved for a mortgage, according to Equifax.

Quick steps to take if you’ve been denied credit

Ask for information on why you’ve been denied

In some provinces, the lender is required to tell you that they’ve denied you credit based on information from a credit reporting agency. They may be required to tell you the source of the credit report used to make their decision as well.

Even if you live in a province where this is not required upfront, it is available upon your request. So, if they don’t give you this information right away, ask for it.

You can also ask the lender why they’ve denied your application. Knowing this will help you understand what you can do in the future to be approved by them.

Pay down debt

If you have been denied credit because of your debt level, then it’s time to face that. Find ways to chip away at the overall balance of the debt. Perhaps take a gig job to earn extra income to pay down the debt. Find savings, cut expenses where you can, and put the extra money towards your debt payments. Even just $25 extra a week will begin to have an impact.

As your debt lowers, your credit score increases, making it easier for you to be approved in the future.

Does getting denied credit hurt my score?

No, being denied credit doesn’t directly hurt your credit score. Your credit report will include the date of the inquiry and the company that initiated it, but the credit bureau doesn’t receive any info on whether you were approved or denied. That said, all credit applications require a hard inquiry into your credit history, which will lower your score by a few points.  

Can I ask for a review when denied credit? 

Yes, but you should come to the table with a concrete reason to challenge a creditor’s decision, like finding a mistake on your credit report and you need to have it corrected with the bureaus.  

If you’ve never looked at your report before and your score is lower than you thought, you might have to adjust your financial habits to improve your credit score before reapplying. 

How to improve your credit score

Despite many misconceptions you may have heard, poor credit doesn’t have to follow you forever. You can rebuild your credit after being denied a loan and get yourself to the point of reapplying confidently. 

Are you interested in learning about improving your credit score? We’ve compiled all the info you need here

 If you can’t seem to improve your credit score no matter what you do, consider credit counselling for individualized credit advice. By finding long-term debt relief solutions, you can finally stabilize your finances.

Why not reapply for credit with a different lender?

When a creditor looks into your credit history, this “hard inquiry,” appears on credit report and indicates that you’re looking to take on new debt. Hard inquiries will temporarily lower your credit score, so multiple inquiries in a short period may hurt more than you anticipated. 

After being denied credit, it can also be tempting to go to an alternative lender or a quick online loan where you do not need to provide any credit history. But payday loans and installment loans can be very dangerous. These lenders may not be as strict, but they charge significantly higher interest rates and fees which can lead to a much larger debt problem. Also, a lender like this may pursue your debt much more aggressively and could eventually send it to collections, hurting your credit score further. 

What if it’s an emergency and I really need a loan? 

Some people will see these circumstances as an opportunity to engage a payday or quick loan from a far-less-than-reputable lender, and this often make emergencies worse.  

If you don’t have an emergency fund and you’re hit with unexpected expenses, the first thing you can do is cut costs. Also consider selling things you no longer use or taking a temporary job. While it can be inconvenient, it will be your money and won’t increase your debt load.

Some final thoughts about being denied credit 

If it happens to you, consider it a warning sign to reassess your financial situation. Short-term solutions will likely add more debt, but finding long-term debt relief solutions can relieve stress and improve your relationships with money. 

The right debt-solution can sometimes provide immediate relief. Contact us today for a free consultation.

Do you have more questions?

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February 1, 2024

What should I do if I’m denied credit?

Being denied credit can be a sign of a larger debt problem. Learn how to find answers and improve your relationship with debt here.

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