Six Steps to Take If Your Credit Application Is Denied
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If you have applied for credit and been denied, don’t panic. Instead, view it as an opportunity to learn why you were denied so you can correct the situation. Make adjustments that will help you better your credit standing so your next application will be approved.
1. Review the denial letter.
If you have been denied a loan, the lender should disclose the reason for the denial in writing. Review this letter in detail. If you have questions, reach out to the lender or financial institution for clarification.
This denial also gives you the opportunity to obtain a free copy of your credit report from the national credit reporting agency (CRA) that was utilized in your application review. Be quick—you need to request your report from the CRA within 60 days of receiving the denial letter.
2. Ask “Why?”
Ask the bank or lender why you were denied. If you get a form letter and it’s not specific enough, or if you don’t understand what it means for your situation, ask your lender for clarification. You may also want to ask what specific steps you should take to make yourself a more viable candidate for a loan in the future.
Asking questions is a great way to show that you are serious about taking action to rectify the situation and that you want to build a long-term relationship with the lender.
3. Request your credit report.
Lenders use the information on your credit report to gauge your riskiness as a borrower. Some factors that often contribute to a denial include high credit utilization ratios (using too much of your available credit), late payments on accounts, and not enough credit history to make a determination.
No matter what the reason is that you have been denied, there are things that you can do to put yourself in a better financial position going forward. Visit www.AnnualCreditReport.com to request a free copy of your credit report. Once you’ve received it, review it thoroughly. If you have high account balances, implement a debt reduction plan and make additional payments to reduce the balances. Continue to pay the minimum each month on all your bills and put any additional dollars towards paying down your debts.
If late payments are a problem, get caught up on those accounts and stay current. A monthly priority-spending plan is an excellent tool to help you stay on track with all of your monthly obligations.
If it’s a lack of sufficient credit history that is preventing your approval, take steps to help build your credit, such as opening and maintaining a secured credit card or retail store card or having a co-signer help you.
4. Review your credit score.
Every application for credit is a hard inquiry on your credit report, and this lets other lenders know that you are seeking access to credit. Initially, a hard inquiry on your credit report can negatively impact your credit score, which lenders use to assess your risk as a borrower.
A low credit score generally causes lenders to see you as a high credit risk, as it indicates that you may have an increased likelihood of defaulting on your loan payments in the future. Conversely, a higher credit score may indicate a low risk of default to the lender.
Keep in mind that your credit score is not the only piece of information a lender considers when deciding whether or not to give you a loan, but it is a very important piece of the application puzzle.
5. Take action to correct the problem.
It may take some time to pay down existing debts, challenge an inaccuracy on your credit report, or pay off an old account. While you’re focused on addressing the issues, do not apply for additional credit. Allow your credit score time to adjust to the corrective action you are taking.
In the meantime, utilize your credit cards (but only if you intend to pay them off in full at the end of the month), continue to make timely payments on each of your debts, and do not accumulate additional debt.
6. Apply again.
Once you have corrected the problems that led to your credit application being denied, let a little time pass and try to apply again. The amount of time you may need to wait depends upon the severity of the denial. For example, if you had erroneous information on your credit report, wait until the information has been corrected, then obtain a copy of your corrected credit report and check your score for changes. Once your score is where you want it to be, consider applying for the loan again.
Mechel Glass is the vice president of education for ClearPoint Credit Counseling Solutions. She is responsible for developing the curriculum and financial education materials for online classes including webinars, podcasts, videos, and listen-on-demand classes. She provides support and training for the agency’s community outreach programs and staff, including financial education specialists in 15 states. Glass also manages the development and reporting of the agency’s online education, and she is the co-author of The Veteran’s Money Book (Career Press, April 2014).
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