Most of us know that you have a higher chance of being accepted for a loan if you have an excellent credit score.
So it can be frustrating to be declined for a personal loan or offered an unexpectedly high APR – particularly if you have a good score. There are many reasons lenders may not offer you a loan, though, so don’t be disheartened if you don’t always get the rate you’re looking for.
In this guide, we explain why you might be declined for a loan even if you have a great credit score.
What is a good credit score?
A good credit score varies across lenders, as each uses their own credit scoring system to assess suitability for a particular product.
Credit reference agencies – the main ones being Experian, Equifax and TransUnion – will provide you with a generic credit score. This gives you an indication of the score you might receive if you were to apply for a loan, but you shouldn’t take these credit scores as gospel.
Though credit scoring systems vary between different organisations, they’re often based on the same suite of information. This includes your credit behaviour (both past and present), your financial stability, and how much debt you currently have. Focusing on improving these factors is more important than solely attempting to boost a score that isn't universally applicable.
I have excellent credit but my application has been denied – why?
There are many reasons why your application might not be successful. Lenders assess applications based on credit risk and affordability – basically how likely you are to be able to afford repayments, and the risk of you defaulting on those repayments in the future. So it’s much more complicated than a simple ‘yes’ or ‘no’ based on your credit score.
Lenders often don’t disclose their assessment criteria to prevent people misusing the system – therefore it can be difficult to say precisely why an application was declined. The best way to improve your chances of being accepted for a loan is to follow good practice.
The nature of the product will determine how many applicants get declined, too. For example, if a lender advertises a loan with a very low APR, they simply can’t risk substantial levels of bad debt as it would affect the product’s profitability. Therefore, acceptance rates are likely to be lower.
Why is the APR I’ve been offered higher than expected?
Lenders will typically reserve their best rates for their best applicants – but, of course, this is subjective and each lender will have their own criteria.
The rate frequently promoted on a lender’s website is called an advertised rate or headline rate. The majority of customers paid out – at least 51% - must be given this rate. When you take into account the number of customers who were declined for the product, only a small percentage of applicants receive the very best rate. So it’s not as unusual as you might think to be offered a slightly higher APR, despite having a strong credit score.
While it’s frustrating not to know why your application has been declined, or why you haven’t been offered the advertised rate, lenders don’t have to provide a reason why. They will be able to tell you which credit reference agency they used to gain access to your credit report, though. So it’s well worth getting a copy of your credit report so you can see for yourself the information you were assessed on.
Ways to improve your chances of loan acceptance and securing the best rate
Each lenders will have different criteria when it comes to assessing applications, but you may find the following tips can help to improve your chances of getting accepted for a loan in the future.
1. Don’t forget the basics
If you think you have an excellent credit score, it’s easy to let simple housekeeping tasks fall by the wayside.
Check your credit report every six months to a year – or before you’re about to apply for credit. Look out for any mistakes, inaccuracies or signs of fraudulent behaviours that could be unnecessarily lowering your credit score.
You may discover financial associations with individuals who have poor credit ratings. Even if you are no longer associated with them, their score might be having an adverse effect on yours. Report any issues to your lender or credit reference agency as soon as possible.
If you have recently moved or have multiple past addresses, ensure that your current address is updated on all your active credit accounts. It’s so easy to forget to do this, but having all your accounts carrying the right address helps lenders and credit reference agencies verify your identity.
For the same reason, you should ensure you’re registered on the electoral roll at your current address.
2. Always pay your existing credit on time
To maintain a good credit history, it is so important to consistently make your monthly repayments on time.
We understand that sometimes life gets in the way, but you should never miss two or more payments without contacting your lender to resolve the situation. Any late or missed payments will be recorded on your credit report and will stay there for the next six years.
3. Keep an eye on your debt-to-income ratio
Assessing your affordability is a key part of any lender’s decision-making process. They’ll look at what percentage of your income is already accounted for by debt (this is your debt-to-income ratio) to examine whether you’re in a financial position to take on additional repayments.
Even people with very good credit history can be declined if the lender thinks there is a risk that the new payments could become unaffordable. So it’s recommended to keep your debt-to-income ratio low if you’re trying to get the best rates on a loan.
4. Try to ensure a consistent flow of income
It’s a good idea to try and ensure a regular income is being paid into your current account, and make sure this is appearing correctly on your credit report. Some lenders might look for a consistent amount over a fixed period of time so being able to demonstrate stability might improve your chances of a successful application.
It’s also worth noting that, if you have experienced a recent change in circumstance, this may not be factored into a lender’s affordability calculation for a number of months. So even if the change is positive – such as a substantial wage rise – it might be beneficial to delay applying for a short while to ensure this is taken into account.
5. Have credit cards with higher limits… but don’t use the maximum amount
It can be a good idea to request a credit limit that’s much greater than the amount you’d typically spend. This will improve your credit utilisation (basically what percentage of the available credit you use). It’s a good way to demonstrate you’re able to manage credit responsibly.
There are two things to keep in mind though:
- The maximum credit limit should still be affordable. So, if you were to hypothetically spend to the credit limit, you would be able to comfortably afford the repayments.
- If you have a tendency to overspend or struggle to limit your impulse purchases, it’s not a good idea to apply for a credit card with a higher credit limit. This could land you in financial difficulty in the future and, should you be unable to afford the repayments, this will do much more harm than good to your credit score in the long run.
6. Consider keeping your old credit card accounts available
If you do open a new credit card, perhaps one with a bigger credit limit, you may find it beneficial to keep your old ones available. This is because, for some lenders, having a long-standing credit account and proving you can manage lots of different accounts can improve your score.
It’s only ever a good idea to keep old credit card accounts open if you aren’t at risk of spending more than you can afford. If you typically find it tricky to juggle different accounts, it might be better for you to close old accounts that you no longer use.
7. Research other options
We all want to be offered the very best rates on the market. But, realistically, lenders can be very selective. There might be some factors involved in the decision that you simply can’t change. Some of the best rates might be reserved for people who have a perfect repayment record, for example, or those who have very low levels of existing debt.
If you believe you’ve done all you can to improve your credit score, the best thing you can do is research your other options. You may choose to wait until your credit history naturally improves over time, accept the lower APR or apply for a different product.
One word of warning, though – don’t apply for several loans within a short timeframe. Each hard credit search will be recorded on your credit report. Though lenders won’t be able to see the outcome of the applications, they will be able to see the credit search and this could have an impact on your application.
Sophie Venner is a Yorkshire-based content writer specialising in crafting content for the financial services industry. She’s written over 300 articles on finance, but she’s covered everything from insurance to digital marketing trends. Her content has been featured in the likes of Semrush, Digital Marketing Magazine and Insurance Business. In her spare time, you won’t find Sophie far from a notepad and pen as she squirrels away trying to write a novel.
Wednesday 12th July 2023