A loan rejection can be distressing, but the good news for people in the nation is that it does not directly damage your credit score. The impact of a rejection is often misunderstood and requires clarity for better financial decisions.
Does a loan rejection affect your credit score?
When an aspirational applicant applies for new credit, lending institutions perform a ‘hard inquiry’ on the borrower’s credit report. Such hard checks, i.e., inquiries, can cause a small yet temporary dip in credit scores.
Still, the outcome of the loan application, whether it is cleared or rejected, is not reported to credit bureaus. This simply means that the mere fact of a loan being rejected is not an important factor in determining creditworthiness.
Multiple loan applications and their impact on credit health
A single loan rejection leaves an individual’s credit score unaffected. Still, multiple loan applications, subsequent rejections, and hard inquiries within a short period of time can negatively influence the borrower’s creditworthiness.
Why timely updates in credit reports matter for loan approvals
Delayed and irregular updates in the credit report can worsen loan approval outcomes. If positive changes and developments, such as repaying debts or clearing pending loans, are not reflected in reports on a prompt basis, then lending institutions may see outdated information and deny credit or offer personal loans at higher interest rates.
To combat this, the RBI has mandated more frequent updates to credit reports at the beginning of this year, requiring banking institutions and credit bureaus to update data every 15 days to ensure timely, accurate, and precise credit assessment of all loan applicants and aspirational borrowers.
Loan eligibility for first-time borrowers without a credit history
No first-time borrower can be rejected for a loan solely due to a lack of credit history, even if they don’t have a credit score to show for it. Financial institutions must portray broader due diligence beyond credit scores and hard inquiries to support new borrowers entering the financial landscape.
The aim behind such regulations is to foster responsible lending and borrowing in the country. It also promotes credit accessibility and financial inclusivity.
Key tips for borrowers to improve credit health after rejection
- Soft inquiries do not affect credit scores: When you check your own credit report or pre-approved offers, then such checks are considered soft inquiries only. A soft inquiry does not influence one’s credit rating.
- Rejection reasons can guide improvements: Lending institutions often provide general reasons for rejections. These reasons can help borrowers correct mistakes and identify gaps in income, documentation, or debt-to-income ratio for future applications.
- Maintain a low credit utilisation ratio: This can help in bringing credit profiles back in order, even after a rejection. Focus on keeping credit card balances and other borrowings low and in check. These steps can boost the chances of future loan approvals.
- Alternative credit data can aid approvals: Non-traditional credit indicators such as on-time utility bill clearances, rent payments, and telecom bills are increasingly gaining importance as alternative credit data forms. Given the policies and rules of your respective lender, borrowers with weak credit histories can secure loans by trying to convince their lender of their repayment integrity and willingness, subject to the final approval of their loans.
- On-time debt clearance outweighs rejections: Sincere clearance of EMIs, credit card bills, car loans, home loans, and other loans on time can gradually strengthen the credit profile, mitigating the impact of previous rejections in the long run.
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