Why has my loan application been turned down?
Summary: This article looks at why a credit or loan application may be refused, and what to do if it is.
When an application for any type of credit is submitted, the lender will want to ensure that they keep any risk to a minimum when it comes to getting their money back, and will usually base their decision on what is known as credit scoring and/or referral to a credit reference agency to check the applicant’s credit history.
What is credit scoring?
When an individual applies for credit, there are often several questions on the application form relating to income, outgoings, existing debt and any assets owned (usually property). There will usually be a score associated with the answers given, and if the score is high enough, then the application will be accepted.
What if I fail the credit score?
If the lender feel the risk is too high, they may offer a lower amount of credit or a higher rate of interest or they could refuse the application altogether. They may not specify the reasons for the failed application, but if asked, they should give a general reason why.
What is a credit record?
An individual’s credit record is held by credit reference agencies, and every application for credit, whether accepted or declined, will be recorded on it. Furthermore, if the applicant has previously defaulted on a loan, been made bankrupt, entered an IVA or Debt Management plan or had any other formal agreement with creditors, then the details are also kept on the credit record, usually for a period of 6 years.
My application failed due to a poor credit record, what does this mean?
Any negative credit history will effectively 'lower' an individual’s credit rating. The lower it is the less likely a lender will approve a credit application. Where an individual has been made bankrupt in the last 6 years, for example, a lender may view this as a particularly high risk and refuse to accept the application.
How can I improve my credit rating?
Simply put, having credit and maintain regular payments without defaulting will go a long way to improve an individual’s rating. For example, using a credit card to make all essential monthly purchases, and then paying the balance every month and on time, will help increase a rating.
My application failed, but I have never had credit before?
There is a common misconception that by never having had previous credit, a credit rating will automatically be high. An individual’s credit rating should be seen as something that has to be earned. With no credit history, how can a lender know if they will get their money back? Ratings will increase based on accepted credit and successful repayment.
Should I apply for as many loans and credit cards as possible in order to increase my credit rating and likelihood of one of them being accepted?
Every time a credit application is refused, it is noted on the credit record, and too many can have a detrimental impact on an individual’s rating. Therefore, it may be better to wait for a response to an application before making another. However, different lenders may have different criteria, therefore where one may refuse an application, another may be happy to accept.
What to do when credit is refused?
Depending on the reasons for the loan application, there may be alternative ways to raise funding, such as setting up a budgeting plan and/or prioritising monthly outgoings. If the individual is in financial difficulty and was applying for additional credit just to get through the month, there may be a debt solution available such as Debt Management Plan (DMP) or an Individual Voluntary Arrangement (IVA).