21st September 2020 - 6 min read
Like any other forms of rejection, getting your credit card or loan applications turned down can be a disheartening experience, especially when you feel that you have been responsible about your finances. Recent data has shown that one out of four housing loan applications are rejected by banks on average, so rejections are not an uncommon experience.
Before rushing to re-apply, what you can do is take the time to find out why your application was rejected so that you can address any financial health issues you may have. Here, we’ll highlight some of the factors that influence a bank’s decision to decline a credit card or loan application.
First and foremost, the main reason banks may decline your application is because your profile does not meet their eligibility criteria – a list used to help them better gauge your financial stability and repayment ability. It includes factors such as your age, marital status, and education level. It could also be influenced by the field that you work in or your position, as well as the length of your current employment period.
Some banks are be more stringent or upfront than others in terms of its eligibility criteria, which is why you sometimes see requirements such as “at least one year in your current employment”. This may pose a setback for individuals who work in the growing gig economy, but it is also possible to convince banks of your repayment ability by supplementing your application with relevant financial documents.
You’d be surprised by how common this is. Applicants may accidentally fill in the wrong details or place them in the wrong sections, provide incomplete forms, or uploading the wrong documents. Sometimes it’s also in the little details, such as sending in a blurry scan or an unclear photocopy of your documents. All these may be enough for a bank to reject an application.
Therefore, it’s important that you double-check your application forms and attach them with clear supporting documents. Most applications call for a similar set of documents, such a copy of your NRIC and various income documents (e.g. payslips, bank statements, EA forms, and employment letter). As such, it may be a good idea for you to prepare clean scans or copies of these basic supporting documents in advance.
Banks may choose to reject your application if they feel that your annual income is insufficient to take on the loan or credit card that you are applying for. Credit cards usually state upfront what minimum annual income is required for a successful application, but with housing loans it depends on the price of the property that you wish to purchase. If you are trying to buy a property that is priced way out of your annual income range, then it is unlikely that the bank will be willing to approve your loan.
Do bear in mind as well that while most banks stick to a general lending guideline set by Bank Negara Malaysia (BNM), they also have varying approval requirements for their credit facilities, including differing annual income bands. This is why you have different chances of approval with different banks.
Banks usually see having some form of credit commitment (such as a loan or credit card) as a positive indicator of your status as a borrower, but it goes without saying that having too many of these may lead them to be more cautious about extending additional credit facilities to you.
One way to identify if you have a high credit commitment is by calculating your debt service ratio (DSR) – which is basically your monthly credit obligations divided by your nett monthly income. This ratio, often referred to in its percentage form, tells banks how much of your income is being used to repay debts – this then helps them decide if you can take another credit line and reliably pay for it. As such, a high DSR means a larger debt commitment – if this ratio is too high, banks will be less willing to deal with you.
Along a similar line of discussion, note that banks are also cautious of applicants who take up too many financial commitments too quickly. The rapid accumulation of debt is a clear red flag of something amiss, unless you can justify it with concrete proof, such as banking statements.
While having too many financial commitments is bad, having none at all can be equally detrimental when it comes to getting your applications approved. Without prior credit history, banks are unable to check your past repayment records and determine if you are a good paymaster.
This concern can crop up when you are applying for loans or credit cards for the first time – by approving your application, banks are only relying on your profile meeting their eligibility criteria and take a chance on you, so to speak. For this reason, it is a good idea to kickstart your credit history as early as possible, such as with entry-level credit cards. Another possible way to counter this is to apply for credit facilities at banks where you already have a relationship with (such as a savings account or fixed deposit account).
Lastly, another common reason for banks to reject credit card or loan applications is the applicant’s credit score. Simply put, credit score is a “measurement” of your creditworthiness. It lets the banks know of your financial health and background, such as the number of credit facilities and amount owed to banks, the types of loans that you are currently servicing, as well as financial delinquencies (if any).
Individuals with higher credit score are considered to possess good financial health, thus increasing their likelihood of their applications being approved. That said, this doesn’t mean that all hope is lost if your credit score is low. While banks do rely on credit scores during the approval process, they take into consideration various other factors as well (such as your employment profile, etc.). At the same time, you can help yourself by working to improve your credit score, which can be as easy as making payments on time.
Given the several reasons discussed as to why banks may reject credit card or loan applications, it’s clear that keeping yourself informed of your financial health is a must. This is even more crucial during challenging times such as the current Covid-19 economy. Also, it is never too late to start applying good money management practices, such as doing a credit check at least once a year.
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