When Good Credit Ain’T Good Enough

In both comments and e-mail, a lot of readers have had a similar complaint recently—they have good credit, but the still get denied for a credit card. In some cases, they even have the interest rates on their current cards raised substantially. So what’s going on here? Why do folks with good credit sometimes get denied credit?

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This issue came up in a conversation I had with an acquaintance who works for a credit card company. And he had a very interesting perspective on how credit card issuers look at credit scores. I’ll share that with you below, but first, let’s look at why lenders look at credit scores at all.

The FICO credit score is designed to reflect the credit risk of potential borrowers. All things being equal, the higher the credit score, the less likely somebody is to default on a loan. But of course, it doesn’t always work out that way. Sometimes, borrowers with high credit scores do default on loans. And of course, many times people with fair to poor credit pay a given loan on time and in full. That is to say, while the FICO score may be an indicator of credit risk, it’s not perfect.

And sometimes, the FICO score is even less reliable an indicator of credit risk than other times. Why? The answer brings me back to the conversation I had with my friend from the credit card issuer. The reason is that there is one thing that a FICO credit score can’t fully predict—loss of employment. When the economy is contracting and jobs are being lost, even folks with good credit can find themselves unemployed. In those circumstances, without an adequate emergency fund, credit cards and other bills can go unpaid.

So if a good credit score isn’t enough, what else do credit card companies look at? And this is where things get interesting. Credit card companies don’t disclose exactly how they evaluate credit card applications. This information is highly proprietary. The better a credit card company is at assessing credit risk, the more profitable it will be. So they don’t want competing credit card companies to know exactly how they assess this risk. But we do know a few things

We know that they want to see financial stability in an applicant. For example, many credit card applications will ask you if you own your home, how long you’ve lived at your current address, how long you’ve worked at your current job, what level of education you attained, and of course, how much you make.

Each of these factors helps card issuers assess an applicant’s financial stability and ability to pay future credit card bills. Of course, these factors are not foolproof. We all probably know people who have been laid off after decades of service at the same company. But it’s the best information credit card companies have to evaluate credit card applicants.

So what does this all mean? Well, for starters, your credit score is still very important. If your score is less than 750, you would do well to work on improving your credit score. And if you don’t know your score, it’s worth a few minutes of your time to get your credit score and evaluate it. I use IDENTITY GUARD® because you get your score from each of the three major credit bureaus, but there are many available options.

However, your credit score will be just one of many factors credit card issuers evaluate. With high unemployment, it may not be given the same weight it is during better economic times.