Can credit card denial hurt your credit score?

It’s never a good feeling being denied credit from a lender.

However, being refused credit is not a deciding factor for credit bureaus when calculating your credit score, and there are ways to safeguard against devaluation when applying for credit cards.

Your credit score is an indication of your financial reputation, and showcases to credit card issuers how reliable you are with your finances, and how risky you could be as a customer. As a credit card can be misused to accrue debt, card issuers want to ensure they’re not putting at-risk customers in bad financial positions.

A credit denial - or approval for that matter - does not have a direct impact on your credit score. Multiple applications (whether denied or approved) may be a red flag to some lenders, as it suggests you have been shopping around for credit.

When you apply for new credit, a lender will typically perform a credit check. This will likely involve a hard inquiry into your credit history, in which the lender pulls your credit report from one of the three primary reporting bureaus - Equifax, Experian and illion.

Making multiple credit applications at once can make you appear ‘credit hungry’ to a lender, so they may be less likely to approve your application. Having multiple credit applications rejected may hurt your credit score and your chances of approval for future products. Therefore, it’s practical to leave a sensible amount of time (at least a number of months) between applications in order to diminish the risk of being penalised.

What could be the reason why your application was knocked back?

There are a number of reasons a lender may reject an application for credit - your income could not be deemed adequate enough to cover the repayments, or they have strict requirements around occupation.

If you are unsure, you can speak with the lender to get a better understanding.

Negative events in your credit history may also be a factor. When the lender reviews your report, they will see your history, both positive and negative.

Negative events reduce your credit score, but they do not last forever. This is how long adverse events may stay on your credit history:

• Repayment history - 2 years
• Credit enquiries and applications - 5 years
• Writs, summons and court judgements - 5 years
• Payment defaults - 5 years
• Bankruptcies, debt agreements and personal insolvency agreements - 7 years

Checking your credit score for free

On average, in Australia most people’s credit scores are between 300 and 850. The higher the score, the more agreeable your credit rating is. A good score is one above 621, according to Equifax. Learning your credit score could assist in negotiating financing and may encourage you to improve your rating.

Checking your own score isn’t the same as a credit check by a bank, and won’t hurt your credit score.

Improving your credit score

The simplest way to boost your credit score is to ensure that you make repayments on time. Fulfilling these obligations will positively impact your performance history.

Doing things like paying down outstanding loans and maintaining consistently low credit card balances may assist in strengthening your credit score. The less credit applications you make, successful or not, can also be useful in sustaining a good score.

Reviewing your credit history to ensure that there are no errors, such as a family member’s information incorrectly added to your file, can also be productive. You may be surprised to learn what events have been recorded that you may not be aware of, such as a late payment for a utilities bill shared with a partner.

It may take several months to get your financial situation back on track, so be realistic about your timeline and goals.