Recently, an aquaintance who shall remain nameless inquired as to whether one of the decline reasons they received on a credit card decline was legitimate or not, excessive unsecured limits.
One of the reasons they were declined by the credit card issuer is that the lender believed the applicant had too much unsecured credit available, even though they were using approximately less than 10% of their availability. Is this a legitimate decline reason?
From the applicant’s perspective, they have not used the line that is available, so how can this possibly be used as a decline reason? If they are not using it, that means they do not owe it. How can they be declined in part for a non-existant debt? This cannot be a valid decline reason.
However, from the lender’s perspective, it is money that is available at anytime to the applicant. The applicant can get a cash advance, or may even have checks on hand against the line which they can simply write a check for and deposit into one of their accounts.
If the applicant encounters an event for which a significant sum of money is required, an illness in the family, elderly care, loss of a job, damage to a home that is not covered, an applicant that had no intention of using the funds, may suddenly do so. When such an event occurs, the applicant now has a significantly higher monthly debt obligation they are obligated to meet.
This monthly debt obligation may also be used in part to calculate their debt to income ratio, possibly resulting in their upper “limits” ratio to exceed the lender’s threshold, resulting in an additional decline reason.
One issue that is hard to distinguish is the possible incorrect inclusion of a revolving home equity line into the analysis. Home equity lines are listed as an “R” for revolving credit by the bureaus. Since a home equity line of credit is secured by the home, it is not unsecured and should not be included as part of an unsecured accounts review. Often, since a home equity line of credit will have a high limit in comparison to credit cards, if it is included in the analysis, it will severely skew the true picture of the applicant’s unsecured accounts and availability.
Nevertheless, while being decline for “excessive unsecured limits” may not seem valid to an applicant, the lenders reasons for doing so are valid enough for them to legitimately justify their position.
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