Loan Rejected by a Financial Institution? Tips to Improve Your Credit Score

Low credit scores, insufficient income, and high existing debts are some of the most common reasons for personal loan rejection. Each denial not only delays your financial goals but may also impact your credit report, potentially lowering your score and making future applications more challenging. However, a personal loan rejection doesn’t mean you have to compromise your goals. By understanding the reasons for loan rejection and learning how to improve your credit score, you can rebuild your creditworthiness and boost your chances of approval.

Let’s explore actionable steps to increase your credit score.

Regularly Clear Your Dues

The importance of payment history in maintaining a healthy credit score cannot be overlooked. Lenders view timely payments as a sign of financial responsibility and a significant indicator of your creditworthiness.

Missing due dates or defaulting on payments can negatively impact your score and make it harder to secure loans in the future. To avoid this, ensure you pay your credit card bills, EMIs, and other financial obligations on time. Setting up reminders or automating payments can help you stay on track and build a strong, positive credit history over time.

Constantly Review Your Credit Report

One of the best credit monitoring tips is regularly reviewing your credit report to identify errors or fraudulent activity that could negatively impact your score. By staying on top of your credit report, you can address discrepancies early and avoid potential issues. Doing so ensures that your financial profile remains accurate and up to date. Coupled with maintaining healthy financial habits, regular checks can help you assess your loan eligibility and ease the loan approval process.

Maintain a Mix of Credit

Lenders prefer to see that you can manage different types of credit, such as credit cards, personal loans, and auto loans, as it demonstrates your ability to handle diverse financial responsibilities.

A healthy mix of secured and unsecured credit can improve your credit score, as long as you manage each account responsibly. However, maintaining a mix of credit requires careful management to ensure payments are made on time and balances are kept low. Additionally, avoid taking out unnecessary loans just to maintain a credit mix, as this can lead to unnecessary debt and financial strain.

Lower Your Credit Spending

High credit utilisation, or spending too much of your available credit, can negatively affect your credit score and is one of the key personal loan rejection reasons. Ideally, your credit utilisation ratio should be 30% or below, meaning you should aim to use no more than 30% of your available credit limit.

To lower your credit spending, focus on paying down existing balances, setting a budget, and avoiding unnecessary purchases. By maintaining a low credit utilisation, you can enhance your creditworthiness and increase your chances of loan approval.

Don’t Apply for Unnecessary Credit

Each time you apply for credit, it results in a hard inquiry on your credit report, which can temporarily lower your score. Frequent applications may also signal financial instability to lenders. To protect your credit score, only apply for credit when necessary and consider whether it aligns with your financial goals. Being mindful of new credit applications helps maintain a positive credit history and improves your chances of approval when you truly need credit.

Keep Your Old Accounts Open

The length of your credit history is a key factor in determining your credit score, and older accounts show that you’ve been managing credit responsibly over time. Closing accounts can shorten your credit history, which may eventually lower your score. If there’s no annual fee, it’s beneficial to keep old accounts open to maintain a positive credit history and improve your creditworthiness. However, it's important to keep open only the accounts that reflect positive financial behaviour and a timely payment history.

In Conclusion

To mitigate the impact of loan rejection, it's important to take a proactive approach to improving your credit score. With consistent effort and smart financial habits – such as paying existing dues on time and keeping credit utilisation low – you can gradually rebuild your financial profile for future applications.

If you're seeking financial support, SMFG India Credit offers personal loans of up to INR 30 lakhs* for eligible applicants with a minimum credit score of 750. With competitive interest rates starting at 13%* per annum and a loan tenure of up to 60 months, the loan can be tailored to suit personal or business expenses. Apply online today!