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Your credit card can give you more flexibility in your day-to-day expenses. However, a credit card is a privilege, and it’s not guaranteed for everyone. Learn the top reasons why a credit card application is denied and what to do when that happens to you.
8 Reasons Why Your Credit Card Application Might Be Denied
1. Your Credit Profile Is Thin
Building credit is essential to a stable financial future. Creditors have a higher degree of trust in well-established borrowers who have a long history of being responsible with their money.
This can feel like a cruel joke because you need credit to build a credit history—but you’ll be denied for credit because you don’t have history!
If your credit profile is thin, you can look for lenders that accept new borrowers with short credit histories. These lenders often charge higher interest rates to offset the risk they’re taking with you, but everyone needs to start somewhere.
2. You Have a Lot of Credit Card Debt
Your credit utilization ratio is the comparison of the amount of credit available to you monthly versus the amount you spend. Ideally, you want your credit utilization ratio to be at 30 percent or lower. So, if you have one credit card with a $5,000 limit and a credit line with a $1,000 limit, your total available monthly credit is $6,000. Ideally, you don’t want to actively use more than 30 percent, or $1,800, of this credit per month.
If your credit cards are maxed out, then your credit utilization ratio is probably out of balance! Lenders might assume that if you can’t pay off your current credit card debt, you won’t be able to pay off new debt.
You couldtart by paying down your current credit card debt, or call your current creditors and ask for higher limits. An increase in your credit card limit could lower your overall credit utilization ratio. This might increase the chance of another creditor approving you for a new card.
3. Your Application Is Incomplete
Ensure you filled out your application properly with the right information. If you forget even the smallest item, it can result in your credit card application being denied. For example, perhaps you stated that your income was $4,000, not $40,000. Or maybe you forgot to include the income earned at your weekend job.
Before you submit your credit card application, thoroughly review all the fields.
4. You’ve Missed One or More Payments
If your recent payment history is less than stellar, there’s a high risk that you’ll be denied. Creditors are scared of individuals who have a poor history of regular payments. If you’re in this situation, consider using credit repair services before you apply for your new credit card. Credit repair can uncover unfair or inaccurate information on your credit report.
5. Your Credit Score Is Too Low
Often, the cards with the best benefits are only offered to people with high credit scores. Banks will typically specify the preferred credit score range for each of their credit cards. Find out your credit score and only apply for cards for which you are in the recommended score range.
6. Your Debt-to-Income Ratio Is Too High
Your debt-to-income ratio is the amount of debt you have versus the income you bring in. It’s a simple calculation that divides total recurring monthly debt by monthly gross income. If your debt-to-income ratio is too high, it essentially means you can’t afford or are at the brink of not being able to afford more debt.
A general rule is to keep your debt-to-income ratio under 36 percent, with no more than 28 percent of your debt going toward your housing.
7. Your Income Is Too Low
One of the most significant factors for a lender is your income. Before a creditor simply hands over funds, they’ll want to be certain you have the ability to pay them back. If your income is too low or you have an unstable source of income, you’re deemed a higher liability to the lender.
Start by applying for the right card. Ifyou’re a new grad, be realistic and go for the basic credit card instead of the platinum card. You might be approved for a card with a low limit, and over time, you can earn the creditor’s trust.
8. There Is an Error on Your Credit Report
It might surprise you to know that credit reports often have mistakes on them. Your credit report may have someone else’s bad debt. Or, your report might list eight credit cards that aren’t actually yours.
Whatever the case, errors on your credit report will usually bring down your credit score. It’s essential you get a copy of your credit report and review it for any errors. If you find any, you will need to dispute them with the relevant credit bureau (TransUnion, Equifax or Experian).
To avoid this happening in the future, practice the good habit of reviewing each of your three credit reports at least once a year. This way, when errors show up, you’ll catch them right away before they spiral into more significant issues.
Does a Credit Card Application Denial Affect Your Credit?
The credit card application denial itself won’t really impact your credit. However, when you apply for credit, a hard inquiry usually occurs on your account. A hard inquiry is when a lender makes a request to review your credit report in the process of reviewing a loan or credit application. This hard inquiry will occur whether you’re approved or denied for the credit card.
A single hard inquiry may not impact your credit score at all. Sometimes, a hard inquiry could lower your score by a few points for a short while. But several hard inquiries in a brief period of time can have a more significant negative impact on your credit score. So, if your credit card application is denied once, it’s not the smartest move to apply for a couple more back-to-back.
What to Do After Your Credit Card Application Is Rejected
The first step you could take after a credit card application is denied is to find out why. Banks are required to give you a reason. This is called an “adverse action” notice. Not only does the letter describe why you were denied, but it also offers suggestions for how you can improve.
Once you understand why you were denied, you can proceed with a plan.
Ask for a Reconsideration
Credit card issuers are mandated to reconsider applications upon request if you have new or additional information to provide. If you believe your application was unfairly denied or there were external factors you can explain, you can request a reconsideration. You can make this request by phone or in writing (depending on the lender). Be prepared to provide proof of your additional information.
Wait to Apply Again
It’s important to wait a little bit, no matter what card you want to apply for. As we’ve previously mentioned, you want to avoid having too many hard inquiries on your credit report too close together. Several back-to-back hard inquiries will only serve to lower your score and likely result in a credit card application denial.
Consider Credit Cards for Bad Credit
You could also consider applying for a credit card that is more lenient to people with bad credit. For example, a secure credit card asks for a security deposit. These types of credit cards are essentially guaranteed for automatic approval as your deposit acts as a guarantee that you can’t overspend.
Review and Improve Your Credit
Take a good look at your credit report and credit score and ask yourself if there’s room for improvement. If you were denied for a legitimate reason, such as too many missed payments or a poor credit utilization ratio, these are factors you can work to improve.
Your credit unlocks many opportunities in life. If your credit card application was denied, it should be a wake-up call that you need to fix your credit. A low credit score could stop you from getting jobs, mortgages or rental agreements, fair interest rates and more. At Lexington Law, we specialize in helping people take back control of their credit. Find out more today.
Reviewed by Kenton Arbon, an Associate Attorney at Lexington Law Firm. Written by Lexington Law.
Kenton Arbon is an Associate Attorney in the Arizona office. Mr. Arbon was born in Bakersfield, California, and grew up in the Northwest. He earned his B.A. in Business Administration, Human Resources Management, while working as an Oregon State Trooper. His interest in the law lead him to relocate to Arizona, attend law school, and graduate from Arizona State College of Law in 2017. Since graduating from law school, Mr. Arbon has worked in multiple compliance domains including anti-money laundering, Medicare Part D, contracts, and debt negotiation. Mr. Arbon is licensed to practice law in Arizona. He is located in the Phoenix office.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.