Credit cards are convenient financial products for your everyday life: they offer quick access to spending power when you need it and can even help you build credit.
Not surprisingly, the majority of people have one. According to the Federal Reserve’s latest U.S. household survey, 83% of adults own at least one credit card.
But what if you’ve gone through the process of applying for a credit card and learn that your application has been denied?
It can be a frustrating experience. But knowing why your application was rejected can help you make the changes needed to get approved. If you don’t, you might get the same decision the next time you apply.
In this article, we’ll discuss why credit card applications are declined; the steps you can take to improve the odds of getting approved and what to do next once you qualify for a credit card.
Why are credit card applications denied?
When your credit card issuer receives your application, it goes through a set of internal credit policies and procedures known as underwriting.
Underwriting is the internal process lenders use to check your creditworthiness and decide whether you are a good risk to receive credit from them. Of course, lenders want your business, but they also want it with as little risk as possible.
As this underwriting process isn’t standardized across lenders, some may have stricter criteria than others. That’s why your credit card application may be declined even if you have good credit and even if in the past other lenders have extended credit to you.
The economy also plays a role. When unemployment is high, lenders may raise their credit standards in anticipation of higher defaults.
Common reasons why credit card applications are denied
While each credit card company has its own independent decision-making process to extend credit, there are some common reasons why your credit card application can be rejected:
Minimum payment history
Issuers use the minimum payment amounts associated with your existing debt. If you have other credit cards, they like to see that you’re paying more than your minimum due.
Your payment behavior is important. It tells issuer banks whether you’ll be able to handle higher payments if you get approved for new credit.
Amount of debt you currently have
Issuing banks don’t like it when you carry too much debt as a proportion of your income because it implies a higher debt-to-income ratio. They get to this number by taking all your monthly debt payments and dividing them by your gross monthly income.
Folks with lower incomes and higher total debt have a lower capacity to repay. And in the eyes of a lender, this high debt-to-income rate makes them riskier when reviewing requests for credit.
So even if you have a good credit score and you’ve been making all your payments on time, you may still get your credit card application rejected because you’re carrying too much debt. If your application is denied because of too much debt, work out a plan to pay it down.
Hard credit checks from new credit applications
When a lender receives a formal credit application from you, they’ll request your credit file as part of their approval process. Credit reporting agencies record this inquiry in your credit report as a hard credit check and it’ll remain in your file for two years.
When it comes to credit cards, having multiple hard inquiries in a short period of time will raise a red flag. Lenders associate these credit requests with higher risk and may get your credit card application rejected.
Negative items in your credit report
The information recorded in your credit report affects whether a credit card application is approved or declined. Late payments and accounts in collections, for example, will increase the likelihood that your application is denied – even if they’re due to a reporting error.
The good news is that by federal law, you’re allowed to get a free annual copy of your credit report every 12 months. Check for these common errors in your credit report and file a dispute with each of the three credit bureaus if you find an error.
Short credit history
Mainstream credit card issuers judge your ability to manage credit through your credit history. If it’s too short, you may not qualify for a new account.
Unfortunately, there isn’t much you can do about a short credit history other than paying your bills on time and waiting.
If you have a short credit history, consider a secured credit card to help you build it. Though these types of cards require a cash deposit that serves as your line of credit, they can help you build credit.
Incorrect information on your application
Sometimes, even if you have a good credit score, the reason why your credit card application is declined is because the issuer is unable to verify your information.
This could be due to a typo or missing information in a mail-in application. If you think you might have made a mistake, contact the issuer to check your information before you reapply.
Also, the issuing bank will send you a notice informing you that you’ve been declined credit. And it’ll highlight the reasons why, including if they were unable to verify your information.
You’re not old enough
To qualify for a credit card, you must be at least 21 years old. If you’re younger, but at least 18, you can qualify for one if you either:
- Have a co-signer that’s at least 21 or
- You’re able to demonstrate income to repay the card’s obligations.
Minors can still get access to a credit card, but only as authorized users. While minimum age restrictions apply, they vary depending on the credit card company.
Lenders will tell you why your credit card application was denied
Under federal law, lenders who deny your credit card application based on information in a credit report, must provide you with an “adverse action” notice within 30 days of them receiving your application.
The notice will list the factors considered and why the lender was unable to offer you credit. The specific format of the notice will vary by lender, but it’ll include:
- The main reasons why your credit application was declined
- A disclosure on the credit bureau that supplied your credit report
- If they used your credit score, the key factors that affect it
- Disclose your right to a free copy of the report used, if requested within 60 days
The information contained in the notice is valuable feedback that can help you narrow down the reasons that led to your credit card denial.
Apply for credit cards that fit your circumstances
Being denied credit can be frustrating, but understanding what credit card companies look for in consumers is one way to improve your chances when you reapply. Some of the key takeaways from what we’ve discussed so far include:
- Applying for several credit cards in a short period of time can hurt your credit
- If your credit card application is declined, lenders are obligated to send you an adverse action letter to learn why
- A credit card rejection – in itself – won’t harm your credit score as hard credit pulls only take place when you submit your application
- Spend some time reviewing credit cards that fit your circumstances
When your credit history isn’t long enough
To limit undue risk, banks need to get an idea of the type of borrower you’re going to be in the future. That’s why the length of your credit history plays a role in their credit decisions. In fact, you need at least six months of credit history to get a FICO score, for example.
If you already have an open credit account such as a loan, continue making your payments and build your credit history for a few more months before you reapply. As an alternative, consider a secured credit card.
Secured credit cards help you build your credit history and look just like regular credit cards. They’re easier to qualify for most people, and require a cash deposit which acts as your credit limit.
If you get rejected because of bad credit
If your application gets rejected because of credit problems, your first priority should be repairing your credit. Some steps to consider include avoid maxing out on your credit cards, paying your bill on time and reducing debt.
Another option you may want to consider is applying for a secured credit card. Most secured card issuers will report your payment behavior to the credit bureaus – which is key. If you pay on time and use your card responsibly, it’ll help you build credit.
» Related: Can $7 a month build your credit with a secured credit card?
» Related: Best secured credit cards.
You’ve been approved, now what?
Once you get approved for a credit card, you’ll want your credit to continue improving over time. The last thing you want is to have your next credit card application denied.
Improving your credit is one of the most important money skills: it could open the door to other financial products in the future.
Consider these next steps:
Pay your bill on time
Your on-time payment is one of the most important factors affecting your credit score and is one that issuers pay attention to. Pay your credit card bill on time every month.
Do not max out your credit cards
Maxing out your credit cards stretches your credit utilization, which can hurt your credit. Keep your credit usage low, if you can, as a utilization rate below 30% is best for credit building.
Credit card companies report your utilization using your statement’s closing balance, so even if you charge a high percentage of your limit and then pay it off, it can still hurt your score.
Get a higher credit limit
Requesting a higher credit limit can lower your utilization rate and help your credit. Use your card responsibility for at least three months, and then get a higher credit limit on your credit card.