Why people with excellent credit scores still get rejected
Over the years, credit scores have become critically important to most Americans. Not only do you need a good score to get a decent rate on a mortgage or auto loan, but credit scores are increasingly being used in other places as well. In most states, auto insurance companies rely heavily upon credit scores to determine premiums. There are even dating sites that match people based upon their credit score.
Unfortunately, an excellent credit score is not a magic ticket. Just because you have a good score does not mean that you will automatically be approved for a loan or credit card. Here are five reasons that you can still get turned down, even if you have a great score.
1. You are a "gamer." The bonus offers on credit cards have become more generous in recent years. Within the last few months, the entire nation went crazy over a 100,000-mile sign-on bonus of a new credit card. However, credit card companies are becoming increasingly savvy in identifying people who go from bonus offer to bonus offer. Within the credit card industry, these folks are called "gamers" because they are trying to game the system, and will not be long-term profitable customers for the banks.
If you take advantage of multiple bonus offers every year, you should not be surprised if you find it increasingly difficult to get approved for a credit card in the future.
2. You do not have sufficient income. The credit reporting agencies do not know your income. Instead, most credit scores are built primarily by looking at your repayment history, total debt, credit card utilization and other factors. The first time a lender knows your income is when you provide it during an application for credit. Lenders use income data for affordability calculations, including the popular debt-to-income measure.
An individual with $10,000 of credit card debt and $100,000 of annual income looks very different from someone with $10,000 of debt and only $25,000 of income. Yet both individuals could have the same score.
If you are applying for a mortgage, you should expect a lender to pay very close attention to the source of your income, not just the amount. Sadly, the system is still built to reward people who have traditional jobs. Freelancers and self-employed applicants will find that the burden of proof will be much higher.
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3. What score is being used anyway? People (and even this article) regularly talk about credit scores as if there is only one. However, there are countless credit scores being used today by lenders, and they can vary significantly. First, there are generic credit scores that are sold to banks. The most famous is FICO, but VantageScore is rapidly growing in popularity. Within FICO and VantageScore, there are multiple versions. On FICO's website, you can see at least 28 different versions of its score.
Most banks do not rely solely upon a generic score like FICO to make a lending decision. Instead, bank risk managers build custom scoring models. For example, if you apply for a credit card at a bank where you have a checking account, your checking account data could be used in a custom scoring model.
Both generic and custom scores are generated based upon data from one of the three credit bureaus. Because the data in all three bureaus does not necessarily match, the score could vary between bureaus.
You might have a 700 VantageScore Version 3.0 being generated by TransUnion from CreditKarma, but your lender could be looking at a completely different score from a completely different bureau and make a different decision as a result.
4. Credit policy rules. In addition to credit scores, banks regularly set credit policy rules. One of the most common is for "thin files," or people with a limited credit history. To have a credit score, you only need one account with six months of history. Many lenders will require much more history. A common thin file requirement used by banks is at least two years of history and at least two active accounts. If you are new to credit and have a relatively short history, your 720 credit score is not as valuable as someone who has 20 years of history and a 720 score.
Depending upon the bank, there can be other requirements. For example, you might need a minimum time at your job or address. Or bankruptcy could mean automatic rejection, even if it is in the past, and your score has recovered.
5. And then there are mortgages. If you are applying for a mortgage, your credit score is just the price of admission. In addition to income requirements, lenders will focus on the down payment amount, your financial reserves, the quality of the home you are buying and many other factors. A credit score can get you prequalified, but a mountain of requirements will need to be fulfilled before you get the money.
What to do. Your credit score is only one part of the credit underwriting process. To have the best chance of approval, focus on living a financially healthy life rather than obsessing over a few points on a credit score. If you pay your bills on time every month, keep your credit card balances very low and build an emergency fund, you should have a good chance of being approved when applying for credit.
If you do get rejected, do not be afraid to shop around. Remember that every lender likely uses a different credit score and policy. While one company might not like your profile, another lender could be happy to have you. And if you are applying for a mortgage, auto loan or student loan, multiple applications in a single shopping period will only count as one credit inquiry.
Copyright 2016 U.S. News & World Report