Many Canadians use a credit card to pay for their purchases since it’s easy, secure and can help to build your credit.1 Applying for a credit card, loan, or line of credit seems straightforward, but if your application has ever been denied it can be very stressful. Here are seven common reasons you may not be getting approved and what you can do to help change that.
1. You already owe money
Creditors consider the balances on your mortgage, line of credit, car loans, student loans, and credit cards when deciding whether to issue you additional credit.
When making decisions about extending new credit, lenders will look to see whether you can afford taking on the new payment. Affordability can be determined by your debt-to-income ratio, or the percentage of your monthly income required to pay your current debts. If the ratio is too high, your credit application may be denied.
The more you owe in relation to both your income and the credit limit, the harder it will be to qualify for a new credit card or line of credit. For the 68% of Canadians who reported having at least one maxed out credit card,2 the odds of having a credit application declined are higher since lenders can go to great lengths to collect unpaid debts.
If your application for a new credit card or line of credit is declined or the credit limit is reduced, consider that your current debt load may be to blame.
2. You've been shopping around for credit
Each time you apply for a car loan, line of credit, credit card, or other credit product, the lender looks at your credit report to determine your creditworthiness. Those inquiries can remain on your credit report for up to six years.3 A request to increase your credit also shows up on your credit report.
Lenders who see multiple applications in a short period of time may take that as an indicator of "credit seeking behaviour." It's a red flag on an application because it may be a sign that you're having financial issues and looking to take on new debt that you may not be able to afford, leading lenders to consider denying your credit application.
3. You have a history of late or missed payments
70% of Canadians pay their balance off in full every month4
If you have ever had a late or missed payment, your credit report will include that information. Late payments generally won't end up on your credit reports for at least 30 days after you miss the payment5. However, anything past 30 days or a missed payment can impact your ability to get approved for new credit because lenders use that information as one of the factors to decide whether you're a good credit risk. A history of missing or late payments, especially recently, increases the possibility that you'll be denied new credit, so paying your bills on time is important.
Even if you're approved for a credit card account or line of credit, you may have a lower credit limit and higher interest rate because of your credit score.
The good news: There are steps you can take to improve your credit score.
4. You don't meet the requirements for credit
To qualify for credit in Canada, you must meet certain basic requirements: You must be the age of majority in your province or territory of residence and be a Canadian citizen or resident.
There can be additional criteria for credit approval depending on the product and/or amount requested. For example, certain credit cards have minimum income limits or credit score requirements. Lenders will pull your credit score in addition to your credit report, and your application could be declined if your credit score is too low or if your criteria doesn’t meet a lender’s minimum requirements. In these cases, you could consider a card with no annual fee or one that includes less additional benefits and features to help build your credit score first.
It's important to read through the requirements set by your lender before submitting your application. Make sure to provide accurate information to avoid having your credit application denied as that inquiry could stay on your credit report.
You can take steps to improve your credit score if a low score is keeping you from getting approved for the credit card, loan, or line of credit you want.
5. You have an unstable income and/or employment
You may need to provide proof of income from a verifiable and legitimate source, including employment, pension, disability, or annuity payments. Lenders may require verification in the form of pay stubs or statements to show that the income you provided in your application is accurate and expected to continue in the future. This information reassures lenders that your ability to afford the new debt will continue.
Consistent employment can also make a lender feel more confident that you have a steady source of income to repay the debt and may be less likely to miss payments.
6. You don't have a lot of experience with credit
Your credit history matters. You need to have credit to show you can handle it and that can be challenging for newcomers to Canada or those who are too young to have strong credit histories.
Look for credit cards designed for students, first-time credit card holders, or new Canadians like the Scotiabank L'earn™ Visa*, SCENE Visa* Card for Students, Scotia Momentum® Visa* Card, or Scotiabank American Express® Card. These cards often have lower limits and may help you build your credit history. Be sure to pay off at least the minimum amounts owed on your credit cards and line of credit each month – on time - so your credit report will show a strong history of on-time payments.
7. There are errors on your credit report
For those with low debt-to-income ratios, solid employment histories, no late or missed payments, and responsible credit use, having a credit card or other credit application rejected could be a sign that something else is off.
Errors on your credit report could be to blame. If you're a Scotiabank customer, you can easily get a free copy of your credit report.6 You can also check for closed accounts reported as open on your credit report (which will affect your debt-to-income ratio), debts listed more than once, or incorrect reports of delinquencies. You'll also want to check for new accounts that you didn't authorize, which could signal identity theft. Those errors could affect your credit score and impact your ability to qualify for new credit and correcting them can help improve your score. A credit monitoring service can provide alerts to changes in your credit score.
Why you may not be getting approved
Too much debt
Missed or late payments
Don’t meet the credit requirements
Unstable income and/or employment
Lack of credit history
Errors on your credit report
What are the factors that affect your credit score — and how to improve it
Even though your credit score plays a role in your ability to access credit, 56% of young Canadians described their credit scores as low.7 Follow these simple steps to help boost your credit score and hopefully increase the chances of having your credit applications approved:
Create a monthly budget
List your income and monthly expenses to make sure there's enough money in your bank account to pay your bills including your credit card or other credit. A budget can prevent you from overspending and taking on more debt that you might have difficulty paying off.
Late or missed payments have a negative impact on your score. Set calendar reminders when your payments are due so you build a history of on time payments that may help boost your credit score.