Let’s face it: getting denied for credit is downright embarrassing. And depending on how strapped you are for cash, a denial notice can send you into panic mode.
To illustrate, pretend your car won’t start. Upon further inspection by the mechanic, you learn that the only way to rectify the issue is by forking over $3,000. Since the car was already on it’s last leg, you decide to throw in the towel and head to the dealership to get a new one.
It only takes a few hours to find an inexpensive ride. But there’s only one problem: the dealership can’t find a lender to approve you. So, you try a few neighboring dealerships and banks, but to no avail. Bummer.
If you’ve ever traveled down this road, here’s what to do:
Step 1: Find out why
You can expect to receive a Notice of Adverse Action in the mail within a week or so. The notice should also include your credit score. But it doesn’t hurt to speak with a loan officer. In most instances, they will be able to give you some insight on the spot. Common reasons include:
- Poor payment history. (Quick note: a single missed payment can tank your score by up to 100 points).
- Late payments, collection accounts, foreclosures, bankruptcies and charge offs. These items affect your credit score for seven years. However, public records linger for 10 years and tax liens can remain on your report and impact your credit score indefinitely.
- A high debt to available credit ratio. This means your outstanding balances are high in proportion to the total credit line. Most lenders like to see this figure below 30 percent on revolving debts.
- Minimal credit history. This is common for credit newbies or those who only have experience with one type of debt product, such as an installment or revolving loan.
- Too many recent hard credit inquiries. Creditors may think you are cash strapped and desperate for a way out.
Step 2: Review the official notice
Be sure to read the entire document when it arrives. Doing so will give you an idea of areas of your credit profile that need improvement. It may also alert you of more issues you weren’t aware of. If you need clarification on any part of the notice, call the lender right away.
Step 3: Request a free copy of your credit report
Within 60 days of receiving the notice, you have the right to request a free copy of your credit report. To get the ball rolling, contact Equifax, TransUnion or Experian. Once you receive it, analyze the contents and proceed to step 4 if you spot errors.
But, if your score is in the trenches due to a series of past missteps, jump ahead to step 6.
Step 4: File a dispute (if applicable)
Did you know that one in every four credit reports contains errors? Well, that’s what a study from the Federal Trade Commission (FTC) found, so you may very well fall into this category. So, if you notice some fishy entries or other errors in your credit report, you’ll need to dispute them. We provide you with all the tools and information to get you started right over here.
You may be want to give up at this point, but don’t.
An omission, error or fraudulent account is not a fair reason for rejection. So, put on your virtual boxing gloves and prepare to duke it out with the creditors and credit bureaus. But don’t waste your time on frivolous disputes.
Step 5: Analyze updated credit report and score (if applicable)
Whew! Now that the dispute process is all done, review your updated report for accuracy. If all is well, jump ahead to step 7. Otherwise, return to step 4.
Step 6: Improve your credit
Start with the first item mentioned in the written notice and work your way down the list. A few more tips:
Get current on all your past due debts and stay current. If needed, reach out to your creditors to make payment arrangements until you get back on track.
Reduce your debt to available credit ratio on revolving debts, or credit cards, to 30 percent or lower.
Only apply for new credit as needed.
Step 7: Re-apply
Once your credit profile and score is up to par, give it another shot. A prior denial doesn’t exclude you from doing business with the creditor. Furthermore, you may qualify for a lower interest rate.
Another Option: Manual Reviews
Most creditors review applications electronically. If they meet the minimum qualification criteria, the application is approved. Otherwise, the application is rejected and transferred to an underwriter. But what if your application doesn’t receive the opportunity to get reviewed by a second set of eyes?
For this reason, you may want to request a second look. In some instances, the underwriter may be able to approve you on the grounds of something they didn’t see beforehand.
A Final Thought
The next time you apply for credit, contact the creditor beforehand to inquire about qualification criteria. While they may not be able to provide specifics, you’ll have a general idea of what they’re looking for in their loan applicants. A few questions to ask:
What is the minimum credit score requirement?
Is there an optimal debt utilization ratio you’re looking for?
What role does my income play in the evaluation process?
Do you consider irregular income?
Will my approval odds increase if I apply for a secured loan?
Do you prefer applicants that have funds available for a down payment?
Furthermore, you’ll be able to decide if it’s worth the risk so you won’t be caught off-guard if your application is rejected.
Have you ever had a credit request denied? Share with us what happened below!