By Michael Axe

Whether you have no credit score or a perfect score , there is always a chance that you could be denied for a loan. To help you keep your chances for a loan denial down, we’ve compiled top five reason why you might be denied for a loan and how you can fix this for next time.

  1. Lack of capacity to repay/debt-to-income ratio is too high.

What this means:

You either don’t make enough money compared to how much you’re asking to borrow or you already have too many loans compared to how much you earn. To calculate your debt-to-income ratio, add up all of your monthly debt obligations (payments on loans and credit cards) and divide that by your monthly income. Most creditors want this number below 45 percent.

Increase your chances of getting approved:

First, ask if there is a smaller loan amount you could be approved for and see if you can make that number work. If not, work on paying off some of your current obligations before applying for a another loan or take on a second job to increase your monthly income. Just remember you may have to prove your income through pay stubs and W-2’s.

  1. Lack of credit

What this means:

Is this the first time you’ve applied for a loan or credit card? If not, maybe you have a newer loan and are in the early stages of building a payment history, or you’re applying for a much higher amount than the loans you have been approved for in the past.

Increase your chances of getting approved:

If you’re just starting out building your credit, you may be able to have someone cosign on the loan. This will help you build your credit as well. Just make sure you’re making on-time payments or your co-signer’s credit will also take a hit. If you have a limited credit history, you may need to just keep making those payments to build your payment history, or you may need to start smaller. Instead of jumping from a credit card to a mortgage, you could start by getting an auto loan. Showing you’re able to make payments on a higher dollar loan may help you get approved for larger loans in the future. Remember to keep an eye on your debt-to-income ratio, you don’t want to overextend yourself.

  1. Excessive credit

What this means:

You applied for or obtained several new loans within a relatively short period of time, you have too many revolving credit balances that are either maxed out or near the limit, or you have too many credit cards open with balances.

Increase your chances of getting approved:

Be cautious of how many loans you apply for within a short period of time; this is a big red flag to lenders. However, if you’re looking for a mortgage, auto or student loan, rate shopping won’t hurt your score if you find a loan within 30-days of the first inquiry. If you are considering taking out multiple loans, such as a credit card and an auto loan, a single lender can oftentimes use the same credit report for multiple loan applications for up to 30 days before a new report needs to be pulled.

In addition, if you have several revolving credit balances, pay them down or pay them off completely. Most experts agree that your credit utilization ratio (how much you owe versus your total credit available) should be at or below 35 percent. You will also want to consider closing out the credit cards that are and paid in full and that you no longer use. It’s recommended that you choose to close out newer credit cards rather than older ones. This is because your credit score will decrease in the event you close out an older loan as apposed to a newer one.

  1. Value or type of collateral not sufficient

What this means:

Either the loan-to-value ratio is too high or, on a vehicle loan, there are too many miles on the vehicle or the vehicle is too old.

Increase your chances of getting approved:

The loan-to-value ratio is calculated by dividing the total loan amount you’re requesting by the value of the property you’re offering as collateral (e.g. a home or vehicle). Every lender has their limits they’ll abide by. If you’re buying the piece of collateral, you could use the appraisal as a negotiating point to lower the price. If you own the property that you’re trying to get a loan on, you could ask what dollar amount the lender would be willing to create a loan for on the property. Otherwise, you could move on and look for a different vehicle, home, etc. that meets the lender’s criteria.

  1. Derogatory Credit

What this means:

Derogatory credit is anything that can negatively effect your credit. This includes bankruptcy filings, liens that are currently past due with other creditors, outstanding collection items, account charge-offs (when a creditor decides to ‘give up’ on collecting on the amount owed), judgments, tax liens, foreclosures, repossessions of property, etc.

Increase your chances of getting approved:

Depending on your financial situation, this may take some time to fix. Ask for a copy of the credit report the lender is looking at to see if any of the items they’re seeing are a mistake. If you’re not sure where to begin, ask your financial institution if they have someone who can help. If you’re an Arizona Federal member, schedule an appointment for a credit consultation here (select the option for Financial Coaching).

Just remember, being denied for a loan allows you to take a closer look at your finances before taking on another loan obligation. Even if you haven’t been denied yet, it’s always a good idea to review your financial situation on a regular basis (at least once per year, if not more) to make sure you’re on track with where you want to go.