When Good Credit Isn't Enough: Why You Could Be Denied A Credit Card Despite Your Excellent Score

It’s bound to happen to all of us at one time or another—you go to apply for a new credit card (or an auto loan, mortgage, or any other line of credit) and, out of nowhere, they turn you down.

Application declined.

You’re shocked. Angry. And—if you know that you have a fairly good credit score—flabbergasted.

“But I have good credit,” you shout. “How can you reject my application?”

A good credit score isn’t everything

If you are a regular reader of this blog or others like it, you probably have a (healthy) obsession with your finances — including your credit health. You check your credit reports at least once a year and perhaps use a free monitoring tool to track your credit score. (Learn how to check your credit score for free now if you haven’t recently.)

We’ve been taught to get this number into the 700s or beyond so that we always qualify for the best interest rates.

Although it’s true that it’s important to have a good credit score, your score is just one of many factors a bank will use in deciding to extend you credit.

Understand the underwriting process

When you apply for credit, whether it’s a credit card with a $3,000 limit or a mortgage for a $300,000 home, your application begins the process called underwriting.

Underwriting is how the bank decides whether to take on the risk of lending you money. Parts of the underwriting process are to comply with laws governing how the bank can lend money, and other parts are to protect the banks’ own interests and ensure the loan is profitable.

In some ways, the stakes for a credit card application are lower than on a big mortgage. The bank puts a lot less money on the line.

But in one respect, credit cards are actually risky for banks. That’s because a credit card is an unsecured debt. A mortgage, on the other hand, is secured. If you don’t pay, the bank can foreclose and take possession of an asset (your house).

If you don’t pay your credit card bill, the bank can send collectors after you all day long, but they can’t come in and take property to cover their loss.

Every credit card company has different underwriting criteria. This is why you can get approved for some credit cards but be turned down for others.

Though their decision-making process is a trade secret, we know generally what they want to see on your report:

No recent late payments or collections activity

Missing a single credit card payment or forgetting about a medical bill that ultimately ends up going to collections isn’t the end of the world. Such a slip might reduce your credit score by 10 or 20 points for a year or two, but it won’t take you from 750 to 500 overnight.

It might, however, prevent you from getting new credit. If you have “potentially negative items” on your credit report like late payments or collections accounts, this could cause you to be denied a new credit card.

Related: Behind on bills? How to catch up.

A low debt utilization ratio

Your debt utilization ratio is the total of your monthly outstanding credit card balances divided by your total credit limit.

Your utilization ratio is calculated using your statement balances—even if you pay the card in full each month.

Lower is better. If your ratio is 50% or higher, it will definitely raise flags in underwriting because it is a common predictor of people who are close to “maxing out” their credit cards.

So if you just have one credit card with a $3,000 limit and regularly spend $2,000, watch out—your utilization ratio is in the danger zone even though you don’t carry a balance. To solve this, you can pay your credit card balance down before the billing cycle ends.

Adequate employment and income

Banks look at your likelihood of repaying a loan based on past behavior (your credit score) and also your ability to repay the loan now (based on income). You’ll be asked to list your annual income and employer. For a larger loan, the bank will verify this data. They may not for a credit card, but don’t expect to be approved for a $10,000 limit card if your annual income is only $20,000.

A long credit history

This is where, despite your best efforts to build good credit, being young works against you. The longer you have been making timely monthly payments on loans and credit cards, the more banks trust that you’re creditworthy.

Building this track record takes years. Your credit age is determined not only by when you opened your first credit account but the average age of all your credit accounts. So whenever you get a new loan or credit card, it reduces the average age of your credit lines.

Although there’s not much you can do about this one except make your timely payments and wait, it’s a reminder that this could be a reason you’re declined on a credit application despite having a good credit score.

Related: How to build credit for the first time

No “credit hungry” behavior

Someone who is eager for more credit—what I describe as being credit hungry—will likely apply for any credit card offer they see. Each time you apply for credit, it creates what’s called a hard inquiry or “hard pull” on your credit report.

Credit bureaus typically look back at the last two years and begin to dock points off your credit score if you have more than one or two hard inquiries. If you have more than a few—especially in the span of just a few months—it indicates that you’re credit hungry and it’s a common reason your credit card application might be denied.

Now, some people do this to exploit signup bonuses and wrack up tons of frequent flyer miles, but most people who are credit hungry are applying because their financial life is a mess and they need credit to stay afloat.

Apply for the right cards!

Understanding what the credit card companies are looking for is one way to help increase your chances of approval for the cards you apply for. Another way is to simply apply for credit cards that have a reputation for giving approval more easily.

When you are in the credit card industry, you can recognize brands that are more generous and flexible about taking a chance with you.

Money Under 30 has done extensive research into finding the cards most approved by issuers.

Here are a few credit cards that, assuming you have the right credit score within that category, will more likely than not stamp your application approved:

Good credit cards with easy approval

Disclaimer – The information about the Wells Fargo Cash Wise Visa card has been collected independently by MoneyUnder30.com. The card details have not been reviewed or approved by the card issuer.

For people with good credit, the highest performing card by this metric is the Wells Fargo Cash Wise Visa® card.

This credit card requires good credit, and as long as you have good credit, you will most likely get approved. If you do, you’ll get great benefits like 1.5% cash back on all purchases without any limits or categories, a juicy $150 signup bonus when you spend $500 in the first three months, and 1.8% cash back rewards on qualified digital wallet payments.

Credit cards with good approval rates even with low credit scores

For people with lower credit, things get a bit more complex. Fortunately, there are still plenty of credit cards that you can apply and be approved for even with poor credit scores.

If this is you, you’d do well to apply for the Secured Mastercard® from Capital One.

This credit card is ideal if your credit score isn’t sterling. You won’t get the exciting benefits or perks that you get from a card like the Wells Fargo Cash Wise Visa® card, but there is a high likelihood you’ll get approved (which is something you aren’t likely to see from a more benefit-laden card).

Additionally, the Capital One Platinum Credit Card boasts a number of really unique benefits relative to the credit level required to get it. Most importantly, it has no annual fee, and it offers a relatively high line of credit which is automatically reviewed after six months of on-time payments.

Summary

That wraps up some common reasons you might be declined for a new credit card even though you’ve got good credit. It’s frustrating, but a credit app decline isn’t the end of the world.

After you’re declined, you’ll get a letter or an email stating some vague reasons your application was rejected. These can seem cryptic, but hopefully this article sheds some light on what the bank was thinking so you can continue to improve your credit and have better luck next time.

Read more

Getting rejected by a credit card company isn’t personal—they’re just running numbers and for some reason you don’t match their profile. Use our resources to learn more about your credit, or find another card you want to apply for:

• Estimate your credit score here
• What credit score do you need to be approved for a credit card?
• The best credit cards for young adults

Editor’s note: This article was originally published in May 2014. It has been thoroughly updated for relevance and accuracy before republication.