Credit Sesame shares the author’s personal account of how she was declined for a pre-approved loan application because of a fatal mistake.
I stared at my screen in disbelief. Why was I declined for a pre-approved loan? Everything seemed to be in my favor:
- Three pre-approved offers
- FICO scores that consistently hovered around 800
- ZERO debt and an 8% credit utilization ratio
- A healthy income, more than enough to qualify
And yet, there was the dreaded popup: “So sorry, we can’t approve you for a loan at this time. You can apply again in 90 days.”
What could possibly have happened? In the interest of full disclosure, I didn’t plan to apply for a personal loan and did not need one. I was writing a lender review for a financial publisher and needed to include information about the application process. So, I was working through the prequalification process, which wasn’t supposed to generate a hard credit inquiry. When three “pre-approved” offers popped up, I clicked on one to see what its fees were. And bang! Immediate popup declining my loan application. Followed shortly by an “adverse action” email. Eek.
As I didn’t want a loan, being declined didn’t really matter. But it stung — no one likes rejection even by a bot. And I was mystified: how could someone as highly qualified as I was be declined for a pre-approved loan?
What I did right to increase my credit score 100 points
In the last 12 months, I increased my credit score by over 100 points by applying carefully for credit and then not using it much. I put one automatic charge, like a streaming service, on each card. And I set them all up with automatic monthly payments, so I created a lot of positive credit history very quickly.
In addition, I collected a ton of airline miles in the process and drove my credit utilization ratio down to almost nothing. Since credit utilization is 30% of a credit score, it helped me make spectacular credit score leaps very quickly. I fully expected to qualify for any loan I wanted (or didn’t want).
Why I was declined for a pre-approved loan
My fatal credit mistake was easy to make. The one credit card that I use for air miles only has a $5,000 limit and I charge my rent and everything I buy on that card. Of course, I pay it off each month. But when I accidentally applied for my personal loan, that card was maxed out. And even if my total credit utilization was under 8%, the utilization on that card was close to 100%. And that, combined with the fact that I had six credit cards (“too many revolving accounts”) was enough to derail my application. Ugh.
How many credit cards is too many?
Then, there is the other reason my loan was declined — too many revolving accounts. But how many revolving accounts is too many? Turns out that the number of accounts probably wasn’t the main issue. The speed with which I opened them was. In my quest to have lots of unused available credit, which did great things for my credit scores, I accidentally created a red flag parade for future lenders.
Opening up a slew of new credit cards over a short period drops the average age of accounts, impacting 10% of your credit score. It also generates “hard” credit inquiries, which show up on your credit report. Having a ton of available credit, especially new credit, can scare lenders.
Mortgage underwriting and new credit cards
According to Freddie Mac’s Selling Guide, underwriters should view the opening of several new accounts with concern.
“…several recently opened accounts may be a warning that the Borrower could become overextended and require a more conservative approach to reviewing both Borrower credit reputation and capacity. A credit history with all recently opened accounts may indicate that the Borrower lacks sufficient experience managing financial obligations.
The [lender] should also review the age of accounts to determine if there has been a significant change in the Borrower’s credit profile. A change in the Borrower’s pattern of credit use, which includes several newly opened revolving accounts, several inquiries and high utilization of revolving Tradelines, introduces significant layering of risk to the Borrower’s credit reputation.”
How to use rewards cards without penalty
While I don’t plan to apply for any loans in the near future, I have taken steps to protect my credit while still maximizing my mileage rewards. It’s simple. I check my card activity and balance online every Monday. And I pay it in full from my checking account. Every single week. If I use it for an especially expensive purchase, like plane tickets or an appliance, I log in immediately and pay the balance. My credit score is up another 20 points.
Another way to guard against the overutilization of one card is to spread out purchases. If you’re chasing rewards, you could use one card that provides the most cash back on gas and groceries for those purchases and another one for travel, etc. Experts recommend keeping utilization on any single card under 30% to avoid ugly surprises when you apply for credit in the future.
The balancing act
Do I regret opening up several new credit cards in one shot? Not really. The end result has been a greatly-improved credit score. But had I been applying for a loan in earnest, my errors could have proven costly. It’s smart to consider all possible credit effects before applying for new credit, closing an account or increasing your balance.
If you found Declined for a pre-approved loan: my fatal mistake interesting, you may enjoy,
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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.
