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There is more to being approved for financing and lines of credit than just your credit score, although your credit score is first and foremost. Depending on the type of credit you’re applying for, additional factors aside from your score may be considered as part of the credit decision. For a low-limit retail store card or in-house financing offer, your FICO score alone may be the determining factor, but for more complex and longer-lasting credit arrangements, other issues also matter.
If you’ve been turned down for new credit but you think your credit score is just fine, you might wonder what drove the rejection. What might have affected your application for new credit could have been other equally important credit factors such as your Verifiable Income, Debt to Income Ratio, and Credit Utilization Ratio among other considerations.
Is Your Verifiable Income Too Low?
You can have excellent credit, but if your income isn’t high enough to support the added debt, you could be turned down. For things like a mortgage or car loan, the lender wants to see verified income such as on a W2, pay stub, or income tax return. With credit card applications, they may take your word for it up to a certain threshold. If you’re turned down for insufficient income, then it might be a sign that you’re attempting to over-borrow.
Is Your Debt to Income Ratio Too High?
Your debt to income ratio is a metric lenders use to determine how much of your income is devoted to servicing your debt and other costs of living. To calculate DTI, add up your monthly debt installments and divide it by your monthly gross income. For instance, if your debt payments total $1000 and your gross income is $4000, that’s 1000/4000=25% DTI. If your debt to income ratio is 30-36%, you should be okay, but if it’s edging towards 40% (or higher), that could explain a rejection.
Is Your Credit Utilization Ratio Excessive?
Another important factor that potential creditors consider is credit utilization ratio. It is a ratio of credit card balances versus credit limits. This determines 30% of your credit score. High credit utilization ratio can signal that you might not be responsible with credit and may be overextending yourself. If your utilization is high, you might be approved but at a higher interest rate than you would prefer. Utilization no higher than 25% is preferred.
Is Your Employment History Erratic?
Depending on the type of credit arrangement for which you’re applying, length of employment history might factor into the lending decision. For a mortgage, employers want to see consistent employability. If you’re thinking of changing jobs and also considering a car or home loan, applying for financing before you swap jobs is probably wiser. Some lenders want to verify your employment and have your employer sign a statement indicating your employment is likely to continue.
Are You Applying For Too Much Credit?
When you apply for credit, a hard inquiry is recorded on your credit report. It only applies to the bureau that the creditor checked (assuming they only checked one), but every inquiry lowers your credit score slightly. Apply for a bunch of new accounts and your score will drop. Apply for a bunch of new credit and creditors will see that you’re looking to open a lot of accounts and they may be less inclined to approve you because many applications at once may be a sign of suspicious activity or bad financial moves.
Rebuilding credit after bankruptcy is a process and keeping your credit score in good shape is a matter of maintenance and ongoing attention. Good credit scores don’t happen by themselves. If you’re just coming out of bankruptcy and looking to re-establish credit, check out Credit Score Keys to make the most of your clean financial slate.