What Is a Credit Denial?
Credit denial is the rejection of a credit application by a prospective lender, usually due to its assessment that the applicant is not creditworthy. The reason is often due to previous blemishes on the borrower's credit history, but it can also stem from an incomplete credit application or lack of any kind of borrowing history that would provide evidence of past repayment experience.
- Credit denial refers to the rejection of a credit application by a lender.
- The rejection can occur due to several reasons, including factors leading to an insufficient credit score such as lack of credit history, over-utilization of available credit, late payments, delinquency, or default.
- The Equal Credit Opportunity Act mandates that lenders that deny credit to their applicants must state their reason for the rejection.
Understanding Credit Denials
Credit denial is common for an individual who has missed or made delayed scheduled payments or defaulted entirely on a bank loan, credit card debt, car loan, etc. When they apply for new credit—say, a store credit card to purchase a 60" HDTV—they will most likely be denied because the merchant is unwilling to bear the risk that the customer will not make some or all of the scheduled payments for the expensive product.
Denial can also occur for an innocent reason. It may be the case there is a missing piece of information or there is incorrect information in the customer's credit report. Without complete information that lenders require, a credit request would be denied. Another possible reason for denial is a lack of credit history—a lender simply does not have enough information on an applicant's past repayment behavior to approve a request for credit. This can occur when someone is just starting out in their 20's, has recently moved to the U.S., or has chosen to not use credit before.
The Equal Credit Opportunity Act mandates that lenders that deny credit to their applicants must state their reason for the rejection. Borrowers who are rejected because of adverse reports from other creditors have the right to review a copy of their credit report.
Changing a Denial into an Approval
In cases where there is a missing piece of information to provide, a discrepancy that needs to be fixed, or some sort of clarification to be made, an applicant may be able to turn a credit denial into an acceptance fairly quickly. However, if a spotty repayment record is involved, or ther is no repayment history to begin with, an individual will have to work on their credit score over months and years to reach a minimal threshold where their future credit applications are no longer denied.
Example of Credit Denial
Due to various personal and monetary problems, Julia had a history of missed payments on her credit card and her account was suspended by the card issuer and the negative behavior was reported to all three credit bureaus. When she applied for another card at a department store near her home, she was rejected due to her previous record. The next month, Julia received a letter from the department store explaining the reasons for her credit application being rejected.