Being refused a loan due to an unknown factor on your credit score can be frustrating and make it very difficult to understand what to do next – without causing further damage!
The first step is to ask why you have been turned down for credit, which is usually because of one of the following reasons:
- Your credit score is low.
- There is negative information, such as late payments.
- The lender thinks you cannot afford the loan.
- Your credit file indicates a query over your identity.
Getting to grips with the cause of the rejection is just the first step, and the good news is that there are plenty of ways to improve your credit rating, remove incorrect reports from your file, or build a better history of good financial management.
Let’s run through an action plan to steer you through the process of dealing with a loan rejection and identifying the best way forward.
Dealing With Credit Refusal
As we’ve mentioned, it’s well worth asking why your application has been refused since many lenders won’t share this information unless you specifically ask for more details.
They don’t necessarily need to give you any justification, but most will confirm the credit referencing agency they use and the criteria against which your loan application has been assessed.
From there, you can download a copy of your credit file from the relevant agency and have the opportunity to scan for mistakes. Check out this guide to learn what you should be reviewing on your credit report.
Reapplying for a Loan After Rejection
Often, a loan provider will turn you down based on their lending policies or other criteria that aren’t usually obvious when you decide to apply.
That means you might have a far better chance of approval with a different lender with more compatible lending rules – but this isn’t always a given.
Credit applications, whether successful or not, will show on your credit report if the lender reaches the stage where they run a credit check; this is called a ‘hard’ credit check.
Soft checks differ and don’t leave any visible mark on your credit report that potential future lenders can see. This article from HSBC UK explores the difference between hard and soft credit checks and why the comparison matters if you’ve been turned down for a loan.
It is essential to pause, regroup, and discover the problems before doing anything further.
Making continued applications could result in numerous hard credit checks (depending on how far you take the application), which could exacerbate the problem and cause further challenges.
Experian, one of the three major UK credit bureaus, explains more about the problem with multiple loan inquiries to demonstrate why this isn’t ideal.
Applying for a Debt Consolidation Loan
Many borrowers want to take out a loan to pay off debts, such as credit cards or short-term loans with high-interest costs.
You can also borrow finances to pay bills or cover short-term living expenses if you have a dip in your regular income.
However, if you have been refused, you should review your outgoings and consider options to reduce your overdraft or other borrowings before applying for additional loans that will carry an interest element.
- Switching energy supplies
- Finding more competitive insurance policies
- Setting a monthly household budget
- Applying for support or benefit payments
Simply applying for more loans is unlikely to be successful if you are struggling with debt – the free advice helpline from Citizens Advice may be useful to help you decide on the right way forward.
If you can demonstrate that you have reduced your debt, got your finances under control, and actively worked to improve your credit score, you will have a better prospect of securing a loan in the future.
Rebuilding a Poor Credit Score
You may be able to repair your credit rating – it can take time but will provide long-term benefits for your future credit applications.
Registering to vote, closing old accounts, paying down debts (even if gradually) and avoiding any other credit agreements will help nudge your credit score upward and prevent further issues.