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If you're like most Americans, you're likely carrying credit card debt. The total credit card debt in the United States stood at $909.9 billion in 2022, according to Experian's 2022 consumer credit review. Average credit card balances increased by 13.2%, with consumers carrying an average credit card debt of $5,910.
Getting a debt consolidation loan can help you get credit card debt under control, but it's not a guarantee you'll be approved for one. If you've been denied a debt consolidation loan, take a moment to understand why you didn't qualify and what you can do before applying for another loan.
Why Can You Be Denied a Debt Consolidation Loan?
Typically, when you're denied a debt consolidation loan, the lender determined you didn't meet their eligibility requirements. Regardless of the specific reason, the lender should disclose why they denied your application so you don't have to wonder. Often, the rejection is due to one of these common issues:
Low Income
When a lender evaluates your debt consolidation loan application, they want to see that your income is sufficient to cover all of your current obligations, with enough funds to comfortably handle a new loan payment. "Comfortably" may be the critical term here, as lenders prefer not to push you into a precarious financial situation where you might struggle to make repayments.
Before you apply for a debt consolidation loan, check to see if the lender has a minimum income requirement. If they do, be ready to provide proof of income that shows you can afford the consolidation loan's monthly payment.
High Debt-to-Income Ratio
One way lenders gauge how well you can manage a new debt consolidation loan is by reviewing your debt-to-income ratio (DTI). This ratio measures the total amount of your monthly debt obligations against your gross monthly income. Lenders typically prefer your DTI to be less than 36%, although some lenders allow for a higher ratio.
For example, if you have $2,500 in monthly debts and gross earnings of $8,000 per month, your DTI would be 31.25% ($2,500 ÷ $8,000 = 0.3125 x 100 = 31.25%).
Poor Credit Score
Your score helps lenders understand the potential risk you pose as a borrower. A higher score typically means you pose less risk than a borrower with a low score. As such, having a high credit score may improve your loan approval odds with favorable rates and terms.
While it's possible to get a debt consolidation loan with a lower credit score, a FICO® Score☉ of at least 670 (considered a "good" credit score) is recommended to improve your odds of loan approval and better interest rates. FICO® Scores are used by 90% of top lenders.
Insufficient credit history or poor payment history can also lead to a denial of a debt consolidation loan. Remember, your payment history is the most important factor in your credit score, comprising 35% of your FICO® Score. Even one missed payment can damage your score.
Lack of Collateral
Most personal loans are unsecured, meaning they don't require collateral. But a lender may want you to apply for a secured debt consolidation loan if you have less-than-ideal credit. From a lender's perspective, the collateral lowers their lending risk since they can keep your collateral to help recoup their loss should you default on the loan.
With a secured loan, you may need to offer cash savings, a vehicle or another form of collateral to qualify. If you don't have sufficient collateral for a secured loan, your lender may deny your application.
What Can You Do if Your Application Was Rejected?
Being denied a debt consolidation loan isn't the end of the road. Here are some steps to take to figure out why you were denied and improve your financial situation in case you decide to apply again.
1. Review the Reason Your Application Was Denied
Whenever a lender denies you credit based on information in your credit report, they must explain why, as per the Fair Credit Reporting Act and Equal Credit Opportunity Act. You should receive an adverse action notice—either verbally, electronically or in writing—within seven to 10 business days of the denial.
The adverse action letter should outline why the lender denied your application, the credit score used and the credit bureau (Experian, TransUnion or Equifax) that supplied the credit report used in calculating your score. Understanding the reason for the loan denial may help you take the necessary steps to improve your credit for future loan applications.
2. Check Your Credit
Now that you know why your debt consolidation loan application was denied, check your credit score and report for specific issues that may harm your credit. Pay particular attention to any issues mentioned in the adverse action letter to help guide your efforts.
You can get your credit reports from all three bureaus through AnnualCreditReport.com once a week. You can also check your credit report for free with Experian anytime.
3. Tackle Credit Issues
Armed with your adverse action letter and your credit report, take the specific steps necessary to improve your credit, such as:
- Make consistent on-time bill payments to build a strong payment history.
- Review your credit report carefully. You have the right to dispute information in your credit report you believe to be incorrect or fraudulent. Doing so can potentially improve your credit score.
- Don't close old credit card accounts. Keeping credit lines open can help you maintain a low credit utilization rate and improve your scores.
Consider looking for ways to build your credit, like asking a close friend or family member with excellent credit to add you as an authorized user on their credit card account. When your status as an authorized user is reported to the credit bureaus, the account's full history appears on your credit report, potentially boosting your score.
4. Improve Your Debt-to-Income Ratio
As mentioned, many lenders look for a debt-to-income ratio of 36% or less, but some may allow for more debt. If your DTI ratio exceeds your lender's threshold, look for ways to pay down your debt and increase your income to make your debt load more manageable.
On the debt side of the equation, try to make extra payments toward the principal on your debt accounts to pay off debt faster. Also, lower your expenses by eliminating rarely used memberships, subscriptions and other discretionary spending items and applying the extra money toward your debt. Following a debt repayment strategy, such as the debt snowball method or debt avalanche method, can help you stay on track to eliminating your debts.
Boosting your income can help you manage debt and reduce your DTI faster. Start at your job and consider volunteering for overtime at work or asking for a wage increase if your pay falls below the market rate. If that's not possible, consider searching for a higher-paying job or taking on a second job or side hustle.
5. Apply With a Different Lender
Eligibility requirements vary by lenders. While some lenders require excellent credit, others have more lenient credit requirements and are more likely to work with borrowers whose credit isn't ideal. If you need funds immediately and can't wait to improve your credit, consider other lenders with credit requirements that align better with your current situation.
Experian CreditMatch™ enables you to prequalify and compare options like credit cards and debt consolidation loans based on your credit history.
Alternatives to Debt Consolidation
Fortunately, if you're unable to qualify for a debt consolidation loan, other options are available. Consider the following options to help you manage and reduce your debt effectively:
- Create a budget to reduce your expenses. Regain control of your debt by designing a budget that lowers your monthly expenditures. Start by identifying and reducing nonessential spending such as entertainment, dining out and unnecessary subscriptions. Redirect the money you save toward your debts to accelerate the payoff schedule and potentially save on interest charges over time.
- Tap into home equity. If you have sufficient equity in your home, you may be able to borrow against it with a home equity loan or home equity line of credit (HELOC). These options usually offer lower rates than credit cards and personal loans. However, home equity loans and lines of credit require your home as collateral, which means you can lose your home if you can't make the payments.
- Consult a certified credit counselor. Credit counseling is a service that can help you plan a course of action to get out of debt. You can meet with a reputable certified credit counselor—like those associated with the National Foundation for Credit Counseling—for free to evaluate your finances. Your counselor can provide personalized advice to develop a budget, get out of debt, avoid bankruptcy and other financial strategies.
- Get on a debt management plan. A credit counselor can also help you set up a debt management plan (DMP). A DMP allows you to make one monthly payment to the credit counseling agency, who then uses those funds to pay your creditors. The primary benefits of a DMP are that it can simplify your debt repayment, and your credit counselor may negotiate with your creditors for lower interest rates and balances. Keep in mind, however, that DMPs typically come with fees and limited access to credit.
Boost Your Credit to Open More Options
Improving your credit score increases your chances for a debt consolidation loan approval since it reduces your perceived risk to lenders. Also, a higher credit score may help you gain access to more loans and other credit options with competitive interest rates.
In addition to the credit improvement steps detailed above, you can use Experian Boost®ø for free. Experian Boost gives you credit for your positive payment history with utilities, video streaming services and even your eligible rent to help improve your score.