Credit cards are great financial tools when used correctly and safely. Swiping your card and paying off the balance each month is an easy way to earn cash back (or hotel points and airline miles) and get other perks like free warranty extension and short term item replacement.
What’s even better is you can be given extra bonus cash back, airline miles, or hotel points just for opening a card and spending a certain amount on the card in the first few months.
But none of that can happen if your application is denied when you try to open the credit card account. There are a lot of myths out there about why you might be declined the ability to open the credit card, but the truth is somewhere in between.
Why Was My Credit Card Application Denied?
Here are 7 reasons your credit card application could be denied:
1. Too Many Recent Inquiries
One of the first things a credit card issuer looks at when determining whether or not to extend credit to you is how many recent inquiries you have. Credit inquiries come in two flavors: a hard pull of your credit report and a soft pull. Hard pulls are directly tied to a lending decision; this is what happens when you apply for a car loan, mortgage, or credit card. Soft pulls are essentially quick looks at your credit to determine whether or not to send you a “You’ve been pre-approved!” package in the mail to try to get you to sign up for the credit card.
Having a bunch of hard credit inquiries over many months shows a lending institution like a credit card company that you continue to need additional credit lines. There may be legitimate reasons for these lines, but it is often seen as someone who is desperate to find more credit to stay afloat.
The best way to limit this is to apply for loans within a short period of time; the ideal is to do them all on the same day so the next company to look at your report doesn’t see the other inquiries yet.
2. Too Much Current Credit Available
Another big determining factor in letting you open a credit card account is your ability to pay back your current credit lines. If you make $40,000 per year and have $150,000 in available credit available you will probably scare off other companies from offering you additional lines of credit. The risk is too great that if you were to suddenly use all of that credit all at once that you would never be able to pay it all back, go bankrupt, and the creditor is left holding the unpaid balance.
3. Too Much Debt
Likewise, having too much debt will definitely scare off new creditors. This is worse than having too much credit available because you’ve already used a lot of the credit that was available to you. You are having to pay back these balances as they currently stand. Offering additional credit is seen as a risky proposition by the credit card company because your income can only stretch so far. If your current debt balances already have your income stretched thin, your credit card application will probably be denied.
4. Too Little Income
Similarly, having too little income can disqualify you from a credit card. Even if you don’t have too much debt or any debt at all, if your income is really small and your other costs like rent are high then you pose the same risk as someone who has too much debt. Again, your income can only be stretched so far and offering you the ability to take on debt to pay off over time, even with a small minimum payment, may result in a denial of a credit card application.
5. Too Many Recent Delinquencies or Charge-Offs
Want to scare a credit card company away? Show them you can’t pay your bills on time or at all. A delinquency can be something as small as a late payment. Not only will a late payment usually result in your interest rate going sky high and dinging you with a fee, but it will also hurt your chances of getting a new credit card. The credit card company looks at your report and sees you have been late in the past, which means you might be late with them.
Obviously having a charge-off is much worse. A charge-off is where your debt was first 30 days late, then 60, then 90, then likely written off as bad debt by the company. This is where the company says we are highly unlikely to receive payment on this debt and they are allowed to write it off against revenue. (Another tidbit: you are technically still legally required to pay the debt even if it is charged-off. Charged-off accounts are turned off so your credit card will no longer work, but you still have to pay your balance.
6. Too Many Accounts Sent to Collections
Many times if you don’t pay your credit card balance over a long period of time the credit card company will sell off the bad debt to a collections company for pennies on the dollar. The collections company hopes to get you to pay some part of the balance in order to gain a profit above what they bought the debt at.
You can recover from having debts sent to collections, although it won’t be pretty. Even if you were sent to collections then paid off the debt it will still show on your credit report. Since you’ve been irresponsible with your debts in the past they may not want to risk being on the bad end of your next debt sent to collections.
7. Too Little Credit History
Another frustrating reason is you may simply not have enough credit history. This is frustrating for someone who is trying to responsibly build their credit history through responsible credit card use. Nonetheless, if no one else has taken a chance on offering you a line of credit then the credit card company may not either. You can try starting with a secured credit card or a card from a community bank or credit union to get started with a small credit line and build from there.