Most people assume that if they have a good credit score they can get credit anywhere. While that’s generally the case, there are a number of situations in which your credit application could be turned down even with a good credit score.
- Your Good Credit Score May be a “FAKO” Score
There are a lot of different credit scores available. The most popular and widely used by lenders is your FICO score. This is the score issued by the three major credit bureaus – Equifax, Experian and TransUnion. Millions of people however access free credit scores, and are provided with scores that are frequently known as “FAKO” scores, since they’re not real FICO scores.
So while you might have a FAKO score of 740, if your FICO is 680, a bank that requires a minimum score of 700 will decline your credit card application.
- The Lender Might Use a Proprietary Credit Score
Some banks don’t even use FICO scores. Instead they use proprietary credit scoring models based on the bank’s actual lending experience. Your credit score under such a model may not be as attractive as your FICO, and the bank may decline your application as a result.
- Insufficient Income
Banks are also interested in your income, since that indicates your ability to make payments on your credit card. The bank may have a minimum income requirement that you do not meet.
They may also look at employment stability. For example, if you’ve only been on your current job for three months, and that was preceded by three months of unemployment, and a previous job that you held for just six months, the bank may determine that you lack employment stability.
- Excess Debt
A bank may have certain debt thresholds that they will not allow to be exceeded. For example, they might make this determination based on either your total level of debt, or the amount of credit card debt you owe.
Still another measure they may use is debt-to-income ratio, known in the lending world as “DTI”. This is determined by dividing your total fixed monthly payments – housing, installment loans, and credit card payments – by your stable monthly income. If your DTI is 63%, and the bank has a DTI ceiling of 50%, your application may be rejected.
- Your Credit Utilization Exceeds Bank Standards
Credit utilization is determined by dividing the total amount of debt you owe by the amount of credit you have available. For example, if you owe $15,000 in credit card debt, and you have total credit lines available of $30,000, your credit utilization ratio 50%. If the bank caps this ratio at 45%, your credit card application could be rejected.
- Too Many Recent Inquiries or New Credit Lines
Credit inquiries are an indication that a lender has pulled your credit report in connection with a credit application. If you have a consistent pattern of applying for credit, the bank may determine that you are either about to build up credit rapidly, or that you bounce between various rewards offers. A bank may also determine that new credit lines haven’t been open long enough to determine a satisfactory payment history.
- You Have Some Old Bad Credit that the Bank Doesn’t Like
Even though you have a good credit score, a bank might reject the your application if your credit report shows a major derogatory entry. For example, a bankruptcy filed six years ago will still appear on your credit report. If the bank’s policy is not to lend money to anyone who has had a bankruptcy in the past seven years, your application can be rejected no matter how high your credit score may be now.
Credit scores are a general indication of creditworthiness. But there are other factors that are used to determine if a bank will approve your application for a credit card.