So you recently applied for credit – whether a personal loan, credit card, or car loan, and you were declined — even though you have a great credit score! What happened?

Well, it happens more than you may realize — and may be even more likely to happen as lenders of all kinds re-evaluate their credit policies and underwriting processes in light of the unprecedented coronavirus pandemic and the accompanying spike in unemployment.

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The key thing to realize is: lenders look at more than just your credit score!

While everything you read online emphasizes your credit score, and you can access your credit score for free on plenty of sites, it’s only one piece of the puzzle.

What is a credit score anyway?

First, it’s important to realize there isn’t a single credit score. There are multiple “models”, which are mathematical formulas that attempt to quantify risk – specifically, the likelihood that you will default on the credit obligation you’re applying for. The two major model groups are FICO®, created by Fair-Isaac Corporation, and VantageScore®, jointly created as a competitor by the three major credit bureaus.

However, even within these two models, there are many variations – different versions of the model and even different applications. If you’re applying for a credit card vs. a personal loan, you may be scored with different models – resulting in different scores. Even the score you may see through a credit education website is different — often this is an “educational” score and may be substantially different than the score a lender uses when you apply.

What should you do if you’re declined?

If you are declined for a credit product, the lender is required to give you (via email or physical mail) a Notice of Adverse Action, detailing the reason they declined you. If your credit score was part of the reason for the decline, the notice should specify that and include what model the lender used and your score from that model. You should also check your credit report on all three bureaus, to determine if there any errors that are negatively impacting your credit score.

Do lenders look at more than credit score?

Absolutely, yes. While all traditional lenders are likely to include your FICO® or VantageScore® (or both!) as a ‘hard cut’ (think of this as a definite rule on who they can approve) , they are likely to look at other parts of your credit report as well. Lenders may include other hard cuts, like having a bankruptcy within the past five years or more than two hard inquiries on your report in the last six months.

Lenders may also employ their own proprietary credit scoring models — these use the same raw data from your credit report, but are customized to the lender and its product. A lender may use this as part of its approval process (determining if you’re approved or declined) or for pricing (determining your interest rate).

Do lenders look at my job or income?

This varies by lender, but lenders are almost certain to incorporate your income (even if this is self-reported). Part of determining if you’re approved for credit is looking at your “ability to pay” — basically, if you have enough income (after other credit payments and expenses) to afford the new credit you’re applying for. If you don’t, you’ll probably be declined. We explain more about how ability to pay is calculated in our personal loans shopping guide.

Depending on the lender, they may also seek to verify your employment or income. Sometimes this can be done automatically (using credit bureau-like services, such as Equifax Verification Services, formerly The Work Number) or by asking you to share banking transaction data by logging into your bank account. If this isn’t possible, a lender may ask to contact your employer to verify employment or ask you to upload paystubs or tax documents (like a W-2) to verify income.

With the rapid changes in the economic climate and with may Americans’ employment in flux, we expect increased verifications of continuing employment and/or income for new applications for credit.

Getting declined for credit isn’t the end of the world — even with a solid credit score, there are a number of reasons why this could happen. The first step is to stay calm – take a look at the Notice of Adverse Action to understand why the lender declined you. With this information, you can determine your next step.

Have a personal finance question?

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photo: Nathan Dumlao on Unsplash