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How Long does a Declined Loan Stay on Your Credit Report?

What happens when you get a loan rejection?

07 February 2022Lloyd Smith 6 min read
How Long does a Declined Loan Stay on Your Credit Report? Rejected loans, credit score

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Applying for a loan takes a lot of work – You look for loan offers available, verify which ones you are eligible for, and compile all of your documents to finally apply for the loan. So the disappointment can be completely understandable and normal when your application ends up getting declined.

But a declined loan does not mean you need to worry about your credit score or future loan applications.

In this article, we discuss how long a declined loan stay on your credit file and how you can actively make sure that it does not impact your credit score.

Your credit file does not say whether a particular application was approved or rejected. Instead what it includes is hard inquiries – which are essentially records of when creditors reviewed your credit score before making a lending decision.

Hard inquiries like loan applications will get listed on your credit report. The only way lenders can predict or assume you have had a lot of rejections before is if they see a long list of hard inquiries on your credit report for a short period of time.

That is why it is always recommended to wait for some time after you get rejected to apply for another loan.

Also, it is important to note that hard inquiries like declined loans can stay on your credit file for up to five years before they are removed from your history. In general, you can also get hard inquiries removed from your credit file if they are incorrect or fraudulent.

Well, not directly.

Getting rejected for a loan does not necessarily impact your credit score. But the actions that you take after your application gets rejected can definitely impact your credit score. For instance, you may get anxious after your application rejection and start applying for loans that you aren’t even eligible for.

As mentioned, loan applications create hard inquiries on your credit report. While one or two inquiries may not affect your credit rating, when you subsequently rake up too many hard inquiries, they can eventually impact your credit score and make it even more difficult for you to get a loan approved.

Remember that the reason for loan rejection isn’t always your credit score eligibility. Sometimes you may even be rejected because you didn’t submit the right documents. Instead of worrying too much about the declined loans, you should look more closely into why the loan got declined in the first place.

There is one exception to this rule though – When you are shopping for a particular type of loan. For instance, if you are looking for an auto loan and looking around at your options, the credit bureau will just treat all of your inquiries within a short period of time as a single inquiry. That means your credit score will also not be affected.

Instead of applying for another loan right away, you should take some time out to understand why your application for the loan was rejected. At the end of the day, your goal should be to apply for a new credit line confidently, knowing that you will most definitely get approved. And for that, you need to do your homework and keep track of your credit rating.

Here are the steps you can take when your loan gets declined:

1 - Carefully read through the decline notice from the provider

The first thing that you should do is try to understand why your loan was declined. Whenever lenders request a loan application, they are required to send a decline notice listing out the reasons why they ended up declining the application.

If you did get declined due to something on your credit report, the notice will explicitly mention that.

But if you just got declined because of incomplete information in the application form or lack of documents, you can go through the details in the report and re-apply for the same loan by including all of the missing information this time.

2 - Check your credit report

All the credit lenders review your credit report to decide whether you are an ideal loan candidate or not. Sometimes, previous inquiries and credit history on your file can also impact their lending decision.

That is why it is important to review your credit report in order to understand if there is anything on it that might have driven the loan provider to reject your application. At the same time, you should also lookout for any inaccuracies and errors in your credit report. In fact, over one in five people have an error in their credit report.

You should look out for any inaccurate information like:

  • Old inquiries that should have been removed from your report by now
  • Closed accounts that are still marked as active
  • Any signs of fraud or identity theft
  • Any unfamiliar accounts or credit applications that you don’t recognise

If you do find any inaccuracies, you can report them to get them taken out of your credit file.

3 - Work on boosting your credit score

If your credit report is accurate but your loan application was still denied, it could be because your credit score was too low to be eligible for the loan.

There can be many reasons for that, including:

  • Late payments: If you have missed payments on credit cards or your previous loans, it may have caught up and affected your credit score. In fact, late payment records can stay on your credit file for up to seven years.

  • High debt to income ratio: If the debt you have taken up is just too high as compared to your total income, it can increase your total credit utilisation and subsequently affect your credit score

  • Maximising credit limit: When your credit cards keep reaching their maximum credit limit, month after month, it can also significantly decrease your credit score. The goal should always be to keep your credit balances at least 30% below the credit limit.

  • Recent inquiries: Have there been too many inquiries lately for different types of credit products? As mentioned above, too many hard inquiries over a short period of time can hurt your credit score in the long run. That is why it is important to always limit your applications and only apply for the credit products that you actually need. Also important to note that only hard inquiries affect your credit score. Soft inquiries like pre-approvals and checking your own credit report do not hurt your score.

  • No credit history: If you don’t have a long enough credit history, lenders may not trust you enough to provide you with a loan, especially if the loan amount is big. In cases like these, you can either consider getting a co-signer with you – a family member or spouse that has a better credit history than you. You can also get a secure credit card that allows you to deposit and borrow money against it. The easiest way to build credit history is to get a credit card, make small payments through it, and pay credit card bills on time.

  • Apply for a smaller loan amount instead: Sometimes banks and lenders just don’t think you are eligible for a significantly large loan and they may therefore end up rejecting your loan application. You can instead consider applying for a smaller loan amount than you previously asked for. A smaller loan appears less risky to lenders and they are more likely to approve your application. It can also help you improve your debt to income ratio and in turn, get larger loan amounts approved in the future. Of course, applying for a lesser amount than needed may not be ideal for you, but it can definitely help you build a better credit history.

4 - Apply for new loans after a while

When you are confident about your credit score and history, you can start applying for loans again. Though, this time, make sure you have researched the lenders enough to ensure your eligibility. Also, remember that all lenders aren’t the same – they each have their own lending criteria, terms, rates, and fees. So make sure you shop around to see all your options and compare loan offers to apply for the one that works best for you.

The bottom line is that a rejected loan does not affect your credit file in the long term. So instead of getting disheartened over loan rejections, you should focus on building a better credit history.

Therefore, the first thing you should do is check your credit report for any recent inquiries. With ClearScore, you can access free credit reports any time. Just sign up and get your credit report emailed directly to you.

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Written by Lloyd Smith

General Manager AU

Lloyd spreads the word about how awesome ClearScore is.