Credit rejection is never ideal. Most people seek credit for one reason – because they need it. Whether you are applying for vehicle finance, a loan for investment, or even a credit or store card, there will normally be an underlying need. Even if you were expecting your recent credit rejection, it doesn’t change the fact that you needed it for something. If it came as a shock and you genuinely cannot think of why this was the case, there are some obvious reasons that we explain here. We also list some less obvious reasons that the public should understand but are generally unaware.
The main reasons for credit rejection
The credit rating is complex, accounting for nuances of your personal finances to help you, creditors, and even your employer understand your credit history. It is not just a score. It is a breakdown of the impacting issues and provides a standard quantified score as a summary. Consequently, there are many elements to a negative score; there is no one aspect that will damage or eliminate past good credit.
Poor payment history
The major credit score companies list payment history as the most important factor, accounting for about 1/3 of the credit score grade. Some state that missing a single payment will have immediate, adverse, long-term consequences on your score regardless of how small the missed payment. This makes getting new credit particularly difficult. Lenders will be keen to understand the likelihood of missing another payment and your long-term ability to pay your debts. Other credit agencies report that one missed payment will impact your score for as long as six years.
Low spare credit
Credit checking organisations check how much credit you are using at any one time in calculating your current score. For example, if your credit cards are nearly at maximum limit and you have several loans, this will negatively impact your score. Lenders will assume you are stretching your finances to the limit. Most people pay for everything on their credit card and clear the balance every month. If you have a high limit and don’t come close to it, this will not negatively impact your score. Credit checks calculate that around 30% of this rating contributes to your overall score.
Overborrowing and bankruptcy
This is where a person borrows more than they are reasonably and perceivably able to afford. The inability to clear debts could lead to debtors pushing for a Debt Relief Order (DRO) or Individual Voluntary Agreement (IVA). County Court Judgements could follow, which raises the possibility of insolvency or bankruptcy. This will have a negative and long-term impact on your ability and right to borrow. You could struggle to open a bank account in the future due to risk of going overdrawn. Overborrowing is the one thing that can most impact your credit score.
Too many new applications
Similarly, there is such a thing as getting too much of a good thing. Even if you have never missed a payment and kept up with minimum payments, applying for too much credit too often will also reflect negatively on you. The perception will be that although you are managing your money, you are likely at the limit and only just keeping your head above the water. Juggling credit is perceived as an attempt at manipulation. Opening new accounts will always impact your credit score, but only by a small amount and only temporarily. Doing so too often will have a cumulative effect.
Low credit mix
Credit mix is an issue of which most credit customers are not aware. Store cards and credit cards are one type. A bank account is another, a mortgage is yet another and so on. Having a good range of credit types is a positive thing for your credit store. However, that means the inverse is true – having a low credit mix, even if you have always kept up payments and next to no history of debt – a lack of credit diversity will mean you will struggle to acquire certain types of credit when needed, such as a bank loan.
No credit history
When you have never borrowed money before, you will have a poor credit score by default. There is no information on which to base an eligibility score or help lenders decide whether to grant a loan. There are many reasons why you will have no credit history; it isn’t limited to having not applied for credit before. If it has been a long time since you’ve applied for credit (more than six years) then the contributing factors towards your credit score would be out of date. No credit history is not a clean slate, it is simply a lack of evidence that you are worthy of credit.
If you are currently looking at a few loans, bad credit could affect your eligibility. Instead, direct your attention to loans and credit specifically aimed at people with poor credit or no credit history on which to rely.