Application denied: 6 reasons for credit rejection

Getting turned down for a credit card hurts. You feel rejected, and it can be hard to figure out why, as bank letters are often vague, which makes it harder to improve your status before you apply again.

"Credit cards are an unsecured form of credit ... so banks have to be confident of the applicant's creditworthiness and identity before issuing a credit card," Kate Payne, spokesperson with the Canadian Banking Association, said in an emailed response to questions. "Credit card applications may be denied for a variety of reasons, and these are business decisions made by individual lenders." 

If you're rejected, you'll receive a letter stating why, says Mike Morley, an accountant and author of Credit for Canadians. However, the reason is sometimes ambiguous, so it's helpful to know the most common reasons for rejection and how you can improve your chances the next time

1. Bad financial history
If you've filed for bankruptcy or a consumer proposal, or defaulted on payments, creditors will make note of these blemishes when they look at your credit report. In addition, any credit rating besides a perfect R1 can make a lender wary of giving you a credit card, says Dan Barnabic, a paralegal specializing in credit issues.

The newer the mistake, the more it'll affect you. "A recent delinquency shows you're not good at managing your money and not paying when you're required to pay," says Laurie Campbell, CEO of Credit Canada. However, all credit behaviour -- good and bad -- will hang around on your report for six years. The best thing you can do is practice responsible repayment habits for about six months, then try again.

2. Not enough or sudden change in income
Some credit cards establish minimum household income limits cardholders must meet to qualify. Income limits will likely be stated in the terms and conditions of the card, which, for most cards, are accessible online, no application necessary. If you don't meet the requirements, you will be denied, says Campbell, so there's no use in even applying.

A change of income status could potentially harm your chances of approval as well. A divorce or partner's death will change your household income, which can make creditors wonder if you can handle the extra debt, even if the card application doesn't state an income requirement.

Job stability is also a factor, so if you're self-employed or have irregular income, it's harder to qualify for a credit card, says Barnabic.

In this situation, you may have a couple of options. First, get a new or second job to improve income stability. Or, simply continue to show positive behaviour with your credit card and keep your debt levels low, and your positive history will eventually be a good sign to lenders.

3. Too much existing or potential debt
Being overextended with debt is one of the top reasons for credit card denials, says Barnabic. Even if you have a good credit history and credit score, if your credit cards are close to the maximum limit, you'll be considered a greater risk, he says.

The number of credit cards you have will also affect your application. "You have too many open lines of credit and too many opportunities to get yourself into debt and a creditor would be wary of that as well," says Campbell.

Each company has its own rule about the ratio of debt to income they'll accept in an applicant, says Morley. Barnabic suggests keeping your credit card balances below 30 per cent of your overall available credit. Try to keep the minimum amount of cards open; an excessive number of cards, even with no balances on them, can hurt you because lenders have no way to know that you won't max out and default on all the cards as soon as you have as much credit as you want.

4. Not enough credit history
Whether you're an immigrant or simply new to credit, if you have no credit history, creditors are hesitant since they have no information to judge whether you'll be able to repay them, says Campbell.

There are ways immigrants can establish a credit history in Canada. For Canadians who are simply new to credit, secured credit cards, which require you to deposit a specific amount to the bank, are a good way to start building your credit history, Massimo Sturino, product manager of TD Travel Cards, said in an email.

"If used responsibly, over time you can build your credit history by paying your credit card bills on time, and eventually your credit rating should be high enough that you can confidently apply, and be approved, for an unsecured credit card," said Sturino.

5. A mistake on your credit report
Whether it's a mistake made by the financial institutions reporting the information to the credit bureau or the credit bureau itself, 10 per cent of the time, these mistakes can affect your ability to be approved for credit, says Barnabic.

"Check your credit report very thoroughly to make sure there are no mistakes or errors in it," he says. Know which mistakes are most common, and how to correct them.

6. Too many credit inquiries
If you've been rejected for a credit card, you may be tempted to reapply right away. Don't. Any other lenders you apply to will see the previous rejection, which may make them reluctant to lend money to you and could add another rejection to your report, says Morley.

If you apply for too many credit cards or loans within a short period, even if you have been approved for them, it makes creditors nervous since it looks like you're gathering funds to go on a huge spree, says Campbell.

You're better off pinpointing the reason for your rejection and working on that first, says Morley. Then, work on fixing the issue before you apply again.

Partial rejections
Some banks that don't feel comfortable with your credit application may not reject it, but will rather set limitations on your use.

"There's different ways of saying yes, [that aren't really] yes," says Morley. For example, if you're applying for a credit card with a $1,000 limit, you may get a $300 limit first so the creditor can minimize risk while seeing how you handle payments. Or you may get the $1,000 limit, but have to give a $1,000 deposit upfront.

To avoid rejection, keep up with your credit score and go into any application with a general idea of your status. That way, you can take steps to elevate your score before you apply.

See related: Watch out for these 7 mistakes when applying for a credit card, Why and how you should ask for a credit limit increase
Updated March 29, 2017

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