3 reasons why a bad credit score could lead to loan rejection
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3 reasons why a bad credit score could lead to loan rejection

  • Highlights

  • Your credit score reflects your entire credit history

  • A low score may mean you have poor repayment history

  • It often indicates a credit hungry behaviour on your part

  • Your loan could be rejected if you have heavy existing debt

Loans from authorized lenders are a great way to finance big purchases. Besides, getting a loan has become easier than before, thanks to simplified application processes. However, all lenders consider your credit history before any approvals. Hence, you should know how to maintain a good credit score. A poor credit score signifies inappropriate debt management in the past. This may lead to loan rejection by the lender.

Here are 3 primary reasons why your loan could get rejected because of bad credit score.

Poor Repayment History

Your credit score considers every debt-related action undertaken by you, whether good or bad. It includes delayed or timely repayments and defaults as well. When a lender gives you a loan, there is a risk of repayment involved. The lender needs assurance that the money lent will be returned and the prospective borrower will not turn into a bad debt. The CIBIL score gives a sneak peek into your repayment history. An in-depth report gives a record of your past debts and instalment history, if they have been done regularly and on time.

Even a single missed payment is likely to have a negative impact on your score. Every lender sets their own rules. Some lenders may treat one missed payment very seriously, while some others may be lenient. An inefficient repayment habit can play a vital role in loan rejections.

Credit Hungry Behaviour

When you apply for a personal loan, the lender raises a credit enquiry. Every time a request is sent for the credit report, it reduces your credit score by a few points because it means you are trying to increase your debt. Thus, if you apply to multiple lenders for a loan at the same time, it will only bring down your score. Your credit report also mentions the number of times you applied for a loan within a specific time frame. Hence, it is important to select lenders wisely before application.

On the other hand, you must also not apply to the same lender again and again. It shows credit-hungry behaviour and could lead to your application been rejected. Also, avoid applying incessantly for a credit card with the same bank.

Additional Read: Where To Check Credit Score

How to Improve Your CIBIL Score

Too Much Existing Debt

A credit report maintains a record of all the debt you have taken and its status. A closed debt is a good sign but the effect of an outstanding debt on your credit report can be undesirable. Applying for a loan when you already have unpaid credit can attract loan rejection. It worries the lender of your ability to repay the loan with a fixed income, monthly expenses and existing debt. In fact, even an excellent credit score, but too many outstanding loans, could lead to a rejection. So, before you apply, make sure your old loans are either closed fully or partially to avoid refusal.

Hence, credit scores and credit approvals go together. Cleaner the credit background, higher the credit worthiness and higher are the chances of approval. Check your credit report before applying for a loan and take necessary actions to build your credit score.

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