What Is a Hard Decline and What Should You Do?

A hard decline signifies a definitive rejection of a new credit application, such as for a loan or credit card. It means the lender cannot approve the request under current circumstances. This differs from a “soft decline,” which indicates a temporary issue or a need for more information, where the transaction might be completed with minor adjustments.

Common Triggers for a Hard Decline

A low credit score is a common reason for a hard decline, as lenders use these scores to assess an applicant’s creditworthiness and likelihood of repayment. Most lenders have a minimum credit score threshold, and falling below it can result in denial. For instance, a FICO score below 670 is often considered fair or poor, increasing lender risk.

A high debt-to-income (DTI) ratio is another frequent trigger, indicating a significant portion of income is allocated to existing debt. Lenders assess this ratio to ensure an applicant has sufficient disposable income for new debt. Insufficient income or an unstable employment history can also lead to a hard decline, as lenders require assurance of consistent repayment ability.

A limited or short credit history can pose a challenge, providing lenders little information on past financial behavior. Applying for too much new credit in a short period can also raise concerns, signaling potential financial distress due to numerous recent credit inquiries. Existing derogatory marks, such as bankruptcies, foreclosures, or late payments, severely impact credit applications. Inaccuracies or incomplete application information, like incorrect addresses or missing income details, can also lead to automatic rejection.

Immediate Consequences of a Hard Decline

A hard decline results in a “hard inquiry” recorded on the applicant’s credit report. A hard inquiry occurs when a lender requests to review a credit report for a loan or credit card application. This inquiry can temporarily impact the credit score, usually causing a small dip of fewer than five points.

While a single hard inquiry has a minimal and temporary effect, multiple hard inquiries within a short timeframe can be viewed negatively by lenders. Numerous recent applications might suggest increased risk or financial instability. Hard inquiries can remain on a credit report for up to two years, though their impact on credit scores diminishes after one year.

Actions to Take After a Hard Decline

Upon receiving a hard decline, first review the adverse action notice, which lenders must provide within 30 days. This letter outlines the specific reasons for the denial, offering insight into the issues. Understanding these reasons is essential for formulating a plan.

Next, obtain and review your credit reports from all three major credit bureaus: Equifax, Experian, and TransUnion. You are entitled to a free copy from each bureau every 12 months. This review helps identify errors or inaccuracies negatively affecting your creditworthiness, which you can then dispute with the reporting companies.

Based on the reasons and your credit report review, focus on strategies to improve your credit health. This involves paying down existing debt to lower your credit utilization ratio and consistently making all payments on time. Establishing responsible payment history is a primary factor in building a stronger credit profile. If too many recent inquiries were a factor, wait three to six months before re-applying for credit. You may also contact the lender for clarification on the denial, as they might offer additional insights or reconsideration.