Have you ever been in a situation where you were denied credit by a financial institution, just when you were waiting eagerly to buy an expensive gadget or appliance? With an increasing number of people applying for different forms of credit, this has become quite a common occurrence nowadays. While such a turn of events dampens the mood, not knowing why the application was rejected adds to the borrower’s frustration. In this age of high dependence on loans to meet a variety of needs, it has become imperative to understand how a financial institution assesses an individual’s creditworthiness and decides whether to accept or reject a credit application.
Your credit report holds the key: When you seek a loan, the financial institution screens your credit report to evaluate the amount of credit you are eligible for and the amount that you can service. This document gives the lender an insight into your identity, your credit history (the loans you have taken in the past), your ongoing credit accounts, payments, recent enquiries for more credit, and of course, your credit score. Lenders tend to favour loan applicants whose credit scores are higher than 750, and may reject those with lower scores.
Note that one refusal for credit from a financial institution will not affect your credit score. While the credit report will reflect your previous applications, the status of approval or denial is not mentioned.
How lenders decide: While you may have applied for credit on the basis of your current income, it is possible that your loan application may not be approved by financial institutions if you do not have a good credit history. Most lenders take into account multiple factors before approving a loan, like your credit history, your current income, the likelihood of paying back the amount sought, and other outstanding credit, including loans and credit card debt.
Suppose that you are the customer of a bank and have applied to it for a loan. The bank will first access all the information about you that is available in its records. Then it will match your records with the information available from a credit bureau. If your application is rejected, the bank will be in an appropriate position to tell you why this happened. A prospective borrower should actively investigate the reason for his proposal getting turned down. If there is a negative remark on your credit report (due to delayed payment or any other reason), you should treat it seriously. You should also take corrective steps against any misreporting, identity theft, or even accounts that you don’t recognise.
If your loan application gets turned down by one bank, do not apply immediately to several others. This will lead to many lenders enquiring about you at the same time. This makes you appear credit hungry and possibly in some form of financial distress. It could imply that you are seeking to borrow beyond your abilities. Multiple enquiries affect your credit score adversely. The ideal way is to start with one lender and wait for its response.
If it is negative, investigate the cause before you approach the credit market again.
Why lenders turn down credit requests: Credit requests get turned down for a variety of reasons. You may have delayed payments, perhaps missed some, or you may even have defaulted on an earlier loan. An error in the credit application form can also lead to rejection, hence you should be cautious while filling it.
The number of customers falling prey to identity theft has risen. A borrower can be denied credit if someone else has been fraudulently accumulating debt on his behalf. If such an incident comes to your notice, report it to the appropriate authorities at the earliest. The customer should then also intimate the bank where the identity theft took place, and also report it to the credit information companies. Nowadays, products that offer protection against identity theft have become available. They notify you if your personal data is being shared on the dark web.
Every credit bureau provides customers with the option of resolving disputes in their credit report. However, any change to the credit report can be done only after receiving concurrence from the bank. If a customer wants a correction, he should send the rectification request to his bank. And once the correction has been made by the bank, an update with the correct information should be sent to the bureau.
Boost your chances of getting a loan: The first thing you must do is to keep close track of your credit history by looking up your credit report from time to time. Not only will this make you more responsible in managing your finances, it will also enable you to take corrective steps on time if required.
The best way to improve your credit score and maintain it at a high level is to make timely repayments on loans and credit cards. Being consistent in this regard will help you build a good credit history. Any loan or credit card balance that is due should be cleared on a priority basis. If you are new to credit, or your score is low due to a past delinquency (delay in payment), which is making it difficult for you to get an ordinary credit card, you should opt to take a fixed deposit-linked or a secured credit card. Settle the dues on this credit card regularly. If you use it prudently, even for smaller purchases, your credit history will improve, and so will your credit score.
The writer is regional MD, decision analytics and business information services at Experian Asia Pacific