Your credit score isn’t looking too bad, and you’ve never missed a repayment. So why are you being refused credit? The reason may surprise you.
Check out our top 5 reasons why you’ve refused credit…
Believe it or not, your credit report is not the only deciding factor when it comes to getting approved for credit. Credit providers look at a variety of factors before deciding to loan you money. It can be an upsetting experience when you get denied, but the good news is that once you know what caused the problem, you’ll be able to fix it.
Here are the top 5 reasons people get their credit applications denied:
1. Your debt-to-income ratio is too high
Do you have an excellent credit score, but you’ve been refused credit? A high debt-to-income ratio may be the reason why.
Your debt ratio is worked out using your total monthly debt repayments and your monthly gross income.
Monthly Debt Repayments / Gross Monthly Income x 100 = Debt-to-Income Ratio %
Lenders need to make sure you can afford to make new debt. If your debt-to-income ratio is more than 40%, that means you’re quite a bit of your monthly salary on debt. This will make it a lot harder to get approved for new credit. Lenders need to make sure that you can afford your monthly repayments over and above your living costs.
A debt-to-income ratio under 20% is generally considered good. However, if your ratio is above 40%, you could be considered a high-risk borrower.
If you feel your debt-to-income ratio may be the reason you’ve been refused credit, there are only two ways to fix it.
- Increase your income
Increase your monthly income without increasing your debt repayments and your debt-to-income ratio will drop. Consider renting out your spare bedroom or begin freelancing on the side.
- Lower your monthly debt repayments
You can fix your debt-to-income ratio using various debt repayment strategies to lower your monthly repayments. Check out our article on debt-to-income ratios for more information.
2. You have “negative items” on your credit report
Your credit report tells lenders how good you are at borrowing money. It will contain both positive and negative factors. Your credit report tracks all your credit accounts. Every time you apply for credit, the credit provider will use your credit report to check whether you have late or skipped payments, and whether you have any judgements or court orders.
It’s important to check your credit score regularly. Especially before you decide to apply for credit. Every South African is entitled to a free credit report from the credit bureaus every 12 months.
If you constantly pay your accounts late, it will affect your score. You will be a higher risk than someone who pays on time. Every late payment stays on your report for one year. However, if you pay the total balance owed on that account in full, the credit bureaus will remove the negative late payment from your credit report as soon as proof of payment has been received from the credit provider.
A court judgement (legal action) is where the court has issued you to pay the outstanding amount that you owe. This will stay on your credit report for 5 years. If you pay the balance in full, it will be removed as soon as you can prove payment.
Even though you can remove negative items from your report by paying outstanding amounts in full, no company can “fix” your credit score for a fee. Don’t be fooled by fraudsters!
The only way you can improve your credit report is by reviewing any negative items and paying them off and by managing your debt correctly.
3. Your credit utilization ratio is too high
Your credit utilization ratio is how much of your balance you are using. If your credit limit is R1000 and you’ve spent R500, your credit utilization will be 50%.
Total Credit Balance / Total Credit Limit x 100 = Credit Utilisation Ratio %
Your credit utilization ratio is one of the biggest influencers on your credit score after your payment history. A good ratio is generally below 30%. Anything higher will put you in the high-risk bracket. If you do get approved, you will often get a higher interest rate compared to someone with a lower ratio.
The most damaging thing you can do for your score is to max out all your limits. This indicates that you may be going through financial difficulty. And unfortunately, your credit score will drop significantly.
If you have paid off accounts and they are sitting without any balances, don’t close them. This will increase your ratio.
How do you lower your credit utilization? By paying more on accounts with the highest balance or by increasing your credit limit.
4. Little to no credit history
If you have a limited credit history, lenders won’t know how good you are at paying your debt. They will be a lot more cautious when it comes to approving credit.
If you’ve had an account open for 6 months or more then you should have a credit history.
The easiest way to start building your credit score is by opening a store account. Keep up with repayments and pay more than your minimum payment. After 6 months you should be able to apply for more credit.
5. “Credit hungry” behaviour
Credit hungry means you have made too many inquiries in a short time frame. In other words, you’ve made too many credit applications in a short space of time. This generally signals that you are going through financial difficulty.
Even if you’ve been accepted, applying for too much credit will drastically drop your score. Try to keep applications to the minimum.
Always ask why your credit application was rejected
All South Africans have the right to be told why their credit application was rejected. In most cases, credit providers won’t tell you why you were rejected.
So, it’s worth finding out so that you can begin fixing the problem.
If the problem is that you already have too much debt and you are struggling to pay your living expenses, then it may be time to get professional help.
Debt Rescue is operated by professionals and we are regulated by the National Credit Act to ensure fair practice to those who are struggling to live due to debt.
Debt counselling can help save your home or your car from repossession, as well as prevent legal action on any of your debt.