Why You Can't Get A Loan, Even WIth A Great Credit Score
Posted on 01 October, 2022 by Miranda Bottas in Finance
Have A Great Credit Score But Still Can't Get That Loan? Here's What You Need To Know...
The idea of credit scoring is nothing new. In fact, it dates back centuries to a period when both the lender and the borrower kept copies of their credits and debts etched into stone tablets.
Naturally, modern credit scoring systems are more advanced, much larger, and very complex.
Today you may find yourself with a high credit score and perfect credit history. You're doing everything that you should be doing as a fiscally responsible individual, and your credit profile reflects it. So why are you still not able to get the loan you want? Well, for starters, you're not the only one.
There Are a Multitude of Factors to Consider
Just because your credit score is high doesn't mean you can walk into your local lending institution and leave with a bag of money or a big fat check with the freedom to purchase anything you desire. In reality, that's a highly unlikely scenario for the vast majority of the population.
Lenders use an array of data sources and require various (and varying) forms of information before deciding to give money to an individual in the form of a loan, or create what is formally known as a line of credit. These data sources are mainly reports provided to them by the major credit bureaus. However that's not all, and they may require much more than that at times.
Typically, your credit score really is not the "end-all" number that we wish lenders would use to make decisions. It's much more complicated than that, and in order to get the money you want or the loan you're seeking you'll need to satisfy a specific set of standards.
It may come as a surprise to some, especially when they assume that their hard work and responsibility should be acknowledged and they deserve the opportunity to acquire new lines of credit. When all we seem to hear about is the importance of our credit scores, why is it that there's so much more involved in the loan approval process than the actual score itself?
For example, a 20 year old individual may have a credit card account they've held open for 2 years. They have never missed or been late on a single payment and usually pay weeks before the balance is even due. The account's history is perfect, the utilization of the card is low, and they have a steady credit score that's been happily hovering around 725 for the last 6 months. So why would this person be denied cards from two different lenders after applying? How is it even possible?
There could be a ton of reasons for the denials, but a few core factors exist that continually prevent people with good or great credit from getting approvals - and they occur more frequently than you might imagine. They include (but of course are not limited to) the following:
- Having no relationship with the lending bank
- Not having enough credit experience or history
- Not having enough provable income or assets
Of course, we're not going to mention having high balances, as that naturally goes against the general rule of maintaining a low utilization rate. But what do the above-mentioned factors really mean and how can they be resolved or at least understood? Let's discuss each issue in a bit more detail.
Having No Relationship With Your Lender
Each and every day, people get loans from companies they've never dealt with before. From auto loans to home mortgages, it's safe to say that probably half of all major loans which are issued are given to people who have no history of financial interactions with that particular company. They're able to acquire the loan because they have a robust credit history and a proven track record of employment and loan diversity within their credit report. Even though their score may be lower than the 22-year old seeking a second credit card, credit bureaus are able to deliver a better prediction of the applicant's financial future and ability to pay. In turn, these people are able to secure a loan with much less hassle and far more attractive repayment terms.
Whenever you're seeking your first loan, your first credit card, or even your second credit card, it is a wise choice to go with an institution who you already have a relationship with. Generally speaking, this would be your bank. Having a simple checking and/or savings account with a particular bank for a few years goes a long way. Especially when you have a consistent history of deposits and have built up a small amount of savings.
Before you decide to seek out a loan from an unknown company, set an appointment with your bank (or just call them) and ask what options are available to you for lending. You might not hear what you wanted to hear or get exactly what you are after, but if anything, they'll point you in the right direction. It's your best bet as a starting point since banks always want to retain you as a customer. They know very well that building a strong and trusted relationship with you is in their best interests (no pun intended) for the long-term.
Not Having Enough Credit Experience or History
One of the biggest things that prevents people (especially those who are new to credit) from getting approved for a new credit card or loan is that they simply don't have enough credit history. When applying for a personal loan, auto loan, or especially something as large as a mortgage loan, the lender will want to see details about your finances. Having had a few credit cards for the last 5 years sometimes just won't cut it.
Often, lenders will ask for your annual income, work history, bank statements, deposit and withdrawal history from your accounts, and even letters from your employer to verify the validity of your income and its source. These inquiries can seem quite invasive and a bit of a hassle at times, but that's just the way things work if you want them to give you money. Another reason some lenders ask the borrower to go to such extremes is to make sure the borrower is serious about repayment. If you're not willing to provide the info they require, they definitely won't be excited about the idea of giving you a large 10-year or 20-year loan.
If you've been denied because your credit history isn't old or full enough, you still have options. You may need to start with a small secured loan, or a simple personal loan with a 12-month repayment term to build a bit more credit worthiness. Once that's been achieved and paid in full, you can then repeat the process - only this time do it for a larger amount. Eventually you'll be eligible for bigger and better lines of credit.
Keep in mind that as you're paying the initial small loan to help build your credit up, your credit card(s) will be aging. Be sure to make timely payments maintain responsible usage habits.
Not Having Enough Income or Personal Assets
This factor is especially crucial when being considered for riskier lines of credit but it can also apply to first-time borrowers. If you cannot prove a sufficient source of income or if you have no income at all, don't expect to be approved for a loan. You probably won't be.
When making consideration whether or not to lend to an individual, that person's income is almost always a factor. The percentage of weight it holds will naturally vary depending on the kind of credit line being issued, but it will definitely play a role.
To explain with a simple example, let's just say that it's not uncommon for people making large sums of money to be denied for seemingly low lines of credit in relation to their income. The reasoning is simple - their money is already tied up. Their income is spread too thin and their credit report shows it. While the lender may see a flawless payment history and high limits, they also can see a hefty mortgage payment, two auto loans, various credit cards with higher than ideal balances and not much expendable income remaining each month. This tends to tell the lender that the borrower doesn't have reasonable means of repayment.
Personal assets can also come into play during the loan process. If you're young and don't have enough income to be approved, you probably don't have many personal assets either. If you owned two homes which were fully paid for and were seeking out a third, the bank can rely on the fact that you have something of value.
Assets are a representation of creditworthiness in many instances, even though they don't show up on your credit report. If you really pressure a loan company to provide you with a credit line but cannot prove a solid source of income, you may be asked to put up an asset as collateral. Without income, and without any assets, it'll be quite difficult to get even a very small loan.
What Can You Do Right Now To Improve Your Odds?
If your credit score is already great but you lack the factors required to buy that first new car or finance a home loan, there are other methods that can work wonders in helping you secure the statistics required to meet the lender's demands. Authorized user tradelines are a lesser-known but highly effective way of doing so, and you'll get a lot of bang for your buck if you use them properly.
An authorized user tradeline is basically the account history of a primary credit card user which will overflow onto your personal credit report. If you're added as a second user on a card that is much older than yours, has a much higher limit, a very low utilization rate and a perfect history of on-time payments, you stand to benefit quite well. When we speak of "overflow", we mean that the history of that card - once you're added as a user - will actually appear on your own credit profile. It's a method for drastically increasing the age and limits of your own credit profile while simultaneously reducing the overall utilization on your credit bureau report.
Typically, people obtain the status of authorized user from a spouse or family member when they've been added as a secondary cardholder. However, there is also a legitimate business service based upon this practice and you can literally buy the tradeline of a complete stranger (yes, legally) to help increase your creditworthiness. In fact, one major advantage to buying authorized user tradelines is that you can choose exactly what you want in terms of the primary account's age and credit limit. That means you have much more flexibility rather than settling for whatever is available from a spouse or relative. Want to purchase a $60k credit limit from an account that's 15 years old? It can be done in minutes, and the results will show in mere weeks.
While buying tradelines doesn't guarantee that you'll be approved for absolutely anything you want, it can greatly improve (and almost assure) the likelihood that you'll be seen as much more attractive to lenders in general. Especially when you know what kind of tradeline you need and purchase it strategically with correct intent. If you're interested in learning more about leveraging authorized user tradelines to your benefit, contact GFS Group today.
As specialists in this field and professionals who offer a plethora of high-quality tradelines for sale, GFS can evaluate your situation and offer customized solutions that will put you on the right track.
While it's not always fair that you're denied a loan you can easily repay, there's always going to be a workaround and purchasing a tradeline (or multiple) may be the key to unlocking your loan approvals.
If You're Going to Buy a Home, Buy Tradelines First