There are quite a few ways you can get declined for a loan, even if you think you have the right FICO score. The P2P lending site Lending Club offers a great deal of transparency into the world of loan origination, and lays out exactly what the triggers might be that cause you to get turned down. 1. Too Many Credit Inquiries Over The Past 6 Months You will be automatically declined for a loan if you’ve had 9 or more credit inquiries in the past six months. While this may sound like a high number, a simple home refinancing application can pull your report numerous times in the weeks leading up to your closing date, as the lender repeatedly checks to make sure that things are still OK with your credit. Throw in a couple of credit card applications or an auto loan, and you can hit nine pretty quickly. Even as few as four credit inquiries will hurt your rate. In the case of Lending Club, this can increase your rate by anywhere from 0.37% to 1.87%. It’s not a huge increase, but worth keeping in mind when you know you have a loan in your near future. 2. Short Credit History This problem affected me while I was attempting to lease a car not long after college. I could afford to pay for the car with cash if necessary, yet the loan officer refused to approve the lease because of my limited credit history . Anyone with less than a three-year history on their oldest loan product will be automatically denied at Lending Club. This is why it is so important to get a no annual fee, low APR credit card that you can keep open for years to come, even if you rarely use it, or decide to switch cards at a later date. 3. Too Few Outstanding Loans You will automatically be denied a loan if you have only had one loan account or less. This means that people who refuse to use credit cards and pay for cars and homes in cash will find it impossible to land a loan at most financial institutions. Even having as many as five past or current accounts can hurt your interest rate. Of course that probably won’t come as much of a disappointment to someone with no credit card debt to consolidate. But what happens in an emergency situation that leaves you in need of cash with nothing but illiquid investments to speak of? Or what if you need a small business credit card to help get your new idea off the ground? Well if you live without credit, don’t expect to get credit. 4. Too Many Outstanding Loans People often ask whether opening too many credit cards can hurt a credit score. We’ve already mentioned credit inquiries, but those go away after 6 months as far as Lending Club is concerned. But if you open more than 21 loan accounts in your lifetime, you become increasingly penalized for having too many lines of credit. Therefore, if you like to take advantage of teaser promotions, such as 30,000 Miles to sign up for an airline card or bonus cash back, be careful not to open more than 15-20 credit card accounts, or else your borrowing rates will suffer. Lending Club doesn’t put an upper limit on the number of accounts you can open before getting denied, but more than 26 will cause your loan rate to jump anywhere from an additional 4% to 8%. 5. Maxed Out Revolving Loan Balances And finally, there’s the measure of how much of your available credit you’re currently using, or what credit bureaus refer to as your credit utilization. Using anything more than 5% and less than 85% of your revolving credit lines won’t hurt you, but you will be denied a loan at Lending Club if your existing revolving balances are completely maxed out. Credit cards are the most common form of revolving balances for consumers, so this means that you won’t be able to get a new loan if you’ve already maxed out your credit cards. When it comes to getting approved for a loan, FICO isn’t the only measure that matters. While important, it’s also important to lenders that you fit a certain mold that tells them you won’t default. There’s a lot of “damned if you do, damned if you don’t” involved in making sure you don’t have too much or too little debt, but as long as you are responsible, everything should work out in your favor.
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Tim Chen: 5 Ways To Get Denied a Loan, Despite A Stellar FICO Score
