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Avoid applying for too many loans at once as this will only hurt your score and lead to more rejections

The rejection of the loan APPLICATION can occur for several reasons. The typical reason for this is inconsistency and late payment of your debts. It can also happen if you don’t know how your adverse credit history leads to loan rejections. If you’ve been rejected recently, it’s important to assess the reasons and work on them. It is also important to keep track of the impact of your loan applications and their rejection on your credit score. Multiple rejections can further damage your credit score, and it may take you months or years to recover. Here are some things you can do if your loan application was recently rejected.

Assess the reason for rejection
Find out why you were rejected. Typically, a lender will provide the reason to help the borrower correct the price and become eligible for the loan. For example, providing a guarantor can help get the loan. Rejections can be caused by a wide variety of reasons such as a bad credit rating (less than 700), insufficient income, too many pending loans, non-payment or late payment of past loans, problematic employment history, legal issues regarding movable and immovable property to be mortgaged by the lender, etc. Rejection can also happen because of errors in your credit report – for example, your PAN is wrongly linked to someone else’s default. Knowing the reason is an important step in improving your credit health.

Work on the reason for refusal
Timely payment of your IMEs and other debts is essential for good credit health, resulting in fewer loan refusals. A good credit score (anything above 750) leads to the best loan deals. If a low credit score has resulted in loan rejection, work on improving it. Full and timely refund of your contributions will start to increase your score again. Keep your credit usage low and don’t close your existing credit cards or request new ones to avoid negatively impacting your score. Your lenders can access the details of your pending loans and request your bank statements to assess the percentage of your income used for IMEs. They prefer that you spend no more than 55-60% of your disposable income on loans. If your income is already increased to this level, you may not be able to repay the new loans and therefore risk being rejected. Higher disposable income is preferable. Also, keep your name, address, signature, PAN, Aadhaar and other loan documents in place so that the rejection is not for a non-financial reason such as a name or an address error.

Do not continue to apply
Every time you apply for a loan or credit card, the lender does a “hard” check on your credit history. Each firm check lowers your credit score slightly. Hence, multiple loan applications in a short period of time will seriously hurt your credit score. If you’ve been rejected once, there’s a good chance you will be rejected again. So avoid applying for too many loans at once as this will only hurt your score and lead to more rejections. Successive physical checks also show that you are greedy for credit, which is a red flag for the lender.

Track your credit score every month
To know what is happening to your credit history and how your score reacts to your payments, arrears or defaults, it is essential to monitor your credit score every month. You can get a free monthly credit report from Experian or CIBIL. The report summarizes your credit activity, repayment history, and loan status. It’s an overview of your financial health. Knowing where your credit score is can help you make decisions to improve it. Monthly tracking also helps spot discrepancies and errors that can also hurt your score. You can report these errors to the appropriate credit bureau.

Reapply as the score improves
Depending on the damage caused by loan refusals, improving your credit rating may take time. It usually takes four to 12 months. However, if you already have a good score above 750, it takes less time to improve it further. Your regularity in debt payments and good credit behavior help you improve a damaged score.

The author is CEO, BankBazaar.com

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