What Is Credit Denial?

The term credit denial refers to the rejection of a credit application by a prospective lender. Financial companies issue denials to applicants who aren't creditworthy. The majority of denials are the result of previous blemishes on a borrower's credit history. A credit denial can also stem from an incomplete credit application or lack of any kind of borrowing history that would provide evidence of past repayment experience. Depending on the circumstances, consumers may be able to reverse a denial and still obtain credit.

Understanding Credit Denials

If you're looking for a new credit card, car loan, mortgage, or any other type of credit, the lender requires you to fill out a credit application. You must include your personal details, Social Security number (SSN), employment history, and any other information deemed necessary in order to facilitate the application process. Lenders approve and advance credit to those who have good credit scores and repayment ability.

Credit denial is common for individuals who miss or delay their payments or default entirely on their previous debt obligations. When they apply for new credit, such as a store credit card to purchase a brand new television, they will most likely be denied because the merchant doesn't want to bear the risk that the customer won't make some or all of the scheduled payments for the expensive product.

Denial can also occur for other reasons, including missing or incorrect information in the customer's credit report. A lack of credit history is also a reason to reject a credit application, as a lender simply doesn't 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, recently moved to the U.S., or never had any credit before.

The Equal Credit Opportunity Act (ECOA) 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. More information on how to turn your rejection into an approval is listed below.

Special Considerations

Receiving a credit denial isn't a be-all-end-all situation. Just because you are denied credit doesn't mean that you won't get any at all. But it helps to review the reasons why you were rejected. Understanding the lender's rationale can help you avoid further rejections and prevent more damage to your credit score.

You may be able to amend your application if there is missing or incorrect information and turn your rejection into an approval fairly quickly. Fix any errors or provide the lender with any information the lender says is missing.

If you're rejected because of the lack of credit history, a short credit report, or a spotty repayment history, you will need to work on your credit score to reach a minimum threshold where their future credit applications are no longer denied.

In other cases, check with the lender if it is willing to provide you with a form of secured debt, such as a secured credit card. This may require you to make a deposit or put up collateral that is valued at or worth the credit line in order to access your new credit.

You can also ask to speak directly to the lender's credit department and make an appeal for approval. Another option is to go through a different lender for the same product. Different lenders have different criteria, which means one may approve your application even if another doesn't.

Example of Credit Denial

Here's a hypothetical example to show credit denials work. Let's say Julia has a history of missed payments on her credit card and her account was suspended by the issuer because of various personal and monetary problems. That negative behavior was reported to all three credit bureaus.

When she applies for another card at a department store near home, the lender rejects her because of her previous record. The company responsible for the department store's credit cards sends Julia a letter explaining the reasons that her credit application is rejected.