Did you recently apply for an auto loan or go through the process of trying to get financing for a new home—only to be denied the loan? While there is no denying that this is a set-back for your financial goals, it is good to know that it isn’t permanent. There are steps that you can take to rebuild your credit and get approved in the future. Don’t worry. There is life after loan denial.
This post is sponsored by CreditRepair.com. All opinions are mine alone and are honestly conveyed.
Common reasons for loan denial
The first thing that you need to do after being denied for a loan is to figure out why you were denied. So let’s go over some of the common reasons that cause a borrower to be denied for a loan:
If you have a low credit score, old, or inaccurate items showing up on your credit report, then you may have been denied for a loan. Your credit score is a quick way for potential creditors to assess your creditworthiness and what risk may be involved for a creditor to extend credit to you. So having a low credit score will definitely impact your ability to be able to qualify for a loan.
If you have been denied for a loan, you are able to request a copy of your credit report. At this point, you should review it to figure out what factors may be pulling your score down. In fact, you may even be doing things to hurt your credit and don’t even know it. Some of the common reasons for a low score are:
- late payments
- too many open accounts
- too many recent credit inquiries
- old accounts still reporting
- collection accounts
It can be complicated and confusing to figure out the best plan to clean up your credit and take steps to increase your score. You may even need to get some professional help to rebuild your credit.
Perhaps you are just starting out and you don’t have much of a credit history at all. A lack of previous creditors reporting on you can actually keep you from getting credit because a potential creditor can’t fully assess your ability or willingness to pay a loan back.
Not enough income
The amount of credit that a potential creditor is willing to extend to you is directly proportionate to the amount of income that you earn each month. Even if you pay your bills on time, you must be able to prove that you have the ability to continue making payments in the future. Showing a substantial, steady income is one indicator to a potential creditor that you have the ability to pay your future obligations.
High debt ratio
Do you have too much debt? Even if you are able to pay your bills on time, if you feel like your budget is stretched each month, it may be because your debt ratio is too high. Having a high debt ratio means that your expenses are high in relation to the amount of income that you have coming in.
Take steps to make sure you are creditworthy
If you have recently been denied for a loan, don’t worry. There are steps that you can take to clean up your credit and increase your score.
Rebuild your credit
If you have late payments or collection accounts that are currently showing on your credit report, it may take some time to get all that cleared up. If you have inaccurate items showing up on your credit report, start the process of getting those cleared off immediately—because getting those resolved can take several weeks, or even a few months. If you are making late payments, you need to work on budgeting your money each month to prioritize paying your bills on time and then spending money on the “wants.” If you write down what you are actually spending your money on each month, you may be surprised at how many things you are buying that aren’t necessary. So, if you can cut a few of those items and focus on getting your current bills paid in a timely manner, you can start to increase your credit score.
Create a credit history
If you are just starting out and building a credit history from ground zero, you may have been denied for credit due to a lack of creditors reporting on you. So to fix this, you want to open a few accounts to have creditors that will be reporting on you each and every month. But don’t just start opening accounts. Opening too many accounts to at once can actually harm your credit. You want to build slowly and positively. In order to to that, a good idea would be to open once credit card (perhaps one that offers points or rewards) and use that card to charge some of the items that you may be paying for in cash right now, such as gas or groceries. Then, make sure that you pay that credit card off each month and make sure that the payment is made on time.
Get a co-borrower
Whether you are lacking credit history or don’t have enough income to get financing on your own, you may need a co-borrower. Make sure to choose a responsible co-borrower, such as a parent, who can add you on to an account, or even help you with financing your first car, so that you can start building a credit history. It is important for both you and your co-borrower that the payments are made on time. The payment history will report for both of you, so choose your co-borrower carefully.
Pay down some of your debt
If you were denied because you have too much debt, or a debt ratio that is too high, you probably should focus on paying down some of the current debt that you have before trying to apply for additional debt. You never want to put yourself in a situation that you are over-extending your budget each month. And paying down current accounts that you have, or even paying them off, will increase your credit score because it shows that you are responsible and able to pay for the current debt that you have taken on.