3 Reasons Besides Your Credit Score You Could Be Denied for a Loan

A young couple check their credit on their laptop at home.
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Yeah, sure. We all know credit scores are important.

When you’re getting a loan to buy a car or a house, you probably need a good credit score.

You’ll also need good credit if you want to refinance your hard-to-manage student loans or your high-interest credit card debt.

But here’s something to keep in mind: If you get turned down for a loan, your credit score might not be the problem.

In fact, your loan could be denied for lots of other reasons.

Here’s the key: If you understand why your loan application got rejected, you stand a better chance of getting the money from another lender.

In any case, don’t give up. This is not the end. Keep looking for a loan, and the next lender you approach might be more welcoming than the one who said no.

Why You’re Struggling With Loan Approval

The Equal Credit Opportunity Act requires lenders to explain why they rejected your loan, but that explanation might not tell the whole story.

Although a good credit score is important, a recent study by Credible documents nearly two dozen other factors that can trip up borrowers — even those with good credit scores.

Here are three unexpected reasons your loan application might be denied — and what you can do about each:

1. Your Credit Is Thin

Building good credit is a classic Catch-22: You need a good credit history to be approved for new credit accounts, but you need active accounts to build a good credit history. Ha ha! Isn’t this game fun?

If your credit file is thin, check out Upstart, a lender geared toward borrowers who get denied by traditional credit models. That includes the self-employed and young millennials with thin credit.

Upstart evaluates credit risk by analyzing factors including a borrower’s education level, employment and geographic location.

Most Upstart borrowers are refinancing credit card balances on which they’re paying an average of 22% interest, Upstart’s CEO tells Benzinga. Their average age: 28.

You only need a FICO score above 620 to borrow from Upstart, while most lenders don’t consider a credit score “good” unless it hits 650.

To see your credit score and understand more about where you stand, sign up for Credit Sesame, a free service that shows you your TransUnion credit score and explains it to you.

Here are some more ways to start building credit.

2. Your Credit Report Has an Error

A young person checks information on her smartphone.
Heather Comparetto/The Penny Hoarder

One out of every five credit reports has an error in it, according to a study by the Federal Trade Commission.

The three major credit bureaus — Equifax, Experian and TransUnion — are each required to give you a free credit report once a year. You can get all three at once through the federally-authorized site Annual Credit Report.

For example, if you find an “unpaid” credit card that you know you paid, or a bill in collections you know never existed, you should file a dispute with whichever credit bureau has the error in their records.

Take a look at your credit report and dispute any incorrect information.

3. You Have Too Much Debt Already

The Credible study also found this: The most common reason borrowers get turned down for refinancing loans isn’t their credit score, but their overall debt-to-income ratio — how much of their take-home pay is used to cover their debt each month.

If you’re already deep in debt, you might need to knock down the balance before you apply for your next loan.

With that in mind, here are some creative ways to pay off debt.

Once you’re ready to get a loan, Credible could be a smart place to start. Here’s how it helped two grad students tackle more than $50,000 in loans each.

Credible is an online marketplace for personalized loan offers. Rates start at 5.40% APR (with autopay), See Terms*, with loan amounts ranging from $600 to $100,000. Think of it like Zillow — but for personal loans.

Get the Loan Next Time

So there are three likely reasons your loan application got denied.

Remember, if you understand the reason, you stand a better chance of getting the money from another lender.

*Read rates and terms at Credible.com

Mike Brassfield ([email protected]) is a senior writer at The Penny Hoarder. He knows a lot about debt, based on his totally fun personal experience with it.