Is Loan Rejection Hurting Your Credit Score?

It hurts when your loan application is rejected. However, it hurts your credit score more than it hurts you. Getting rejected for a loan is bad for the score, not just for the short term, but for the long term as well. Getting rejected once increases your chances of getting rejected by other lenders as well. Yes, these things do get recorded in your credit report, and thus damage the score.

If your credit score is low, it can be due to a wide variety of factors. It can be due to debt settlements, on-payment of debts, not paying debt installments on time, high credit utilization, and much more. Thus, there can be many reasons for a low credit score.

The good news is that there are just as some ways to improve or increase it. But you won’t go into those points in this article. Here we shall detail out the impact of a rejected loan application on your credit score.

What is the credit score?

Your credit score is a 3-digit number that measures your credit worthiness, or how likely you are to repay loans. If the score goes down due to whatever reason, other lenders will see you are a risky candidate to give loans to.

Impact of a loan rejection on your credit score

Lenders make a credit inquiry each time you apply for a loan. This is known as a hard inquiry, which alone lowers your score if just a little bit. This is why experts warn not to apply at too many places at once for credit, as it only increases the risk of multiple rejections.

Thus, be careful before applying for credit. If there is a rejection, ask the bank or lender why it was so. Ensure that you don’t make the mistake again while applying next time.

Reasons why your loan may have been rejected

There can be many reasons behind a loan rejection. To know the reason behind a loan rejection, and what is affecting the score, check your credit report. Here are the common reasons behind a low credit score.

1. Taking multiple loans: Do you have more than one loan account? If so, banks are more likely to refuse you loans and even credit cards. This is because they see you as one with an unstable personal finance since you are always in need of loans.

2. Loans defaulted: Too many of these, regardless of whether it was solely your account or whether it was a joint-loan account, you will be penalized by loan denial later on. Banks don’t want to give loans to one who has defaulted on loans.

3. Credit score remarks: Loan defaults are not the only problem which can lower your credit score. Did you make a debt settlement with a bank? If so, then your credit report now contains the remark “settled.” This makes it hard to get loans later. However, you can still get credit if you give security. Lenders are more likely to reject unsecured loan applications at this point.

4. Employment status: Incidents of late salary credits and when the employer is not well-known to the bank can give rise to loan rejections.

6 things to do to raise your credit score?

Here are a few things you can do to get back on track. It’ll take time, but you’ll get there.

1.  Pay off all debts

2. Have a low credit utilization ratio, below 30%

3. Pay overdue bills

4. Do not take multiple loans

5. Get a loan tenure which suits you

6. Get mixed loans

Follow these tips, you'll get over a loan rejection.