Credit rejections are more common than people realize and while a credit denial can be crushing and feel like a real setback, it doesn’t necessarily spell doom for your financial future.
In fact, it can be a good opportunity to take proactive steps to improve your credit history long-term. What you do after your credit application is denied is important for making sure you don't damage your credit any further.
“It’s not the end of the world,” says Andrew McCormack, a market leader with BB&T Bank, 1570 Manheim Pike, Lancaster. “The thing to do is pull those credit reports to verify their accuracy at least once a year. If there is a discrepancy, dispute it right away.”
Improving your credit status is not a difficult task. Here’s what you should do:
1. Avoid applying for more credit to see if you'll get approved. The more credit applications you put in, the more likely it is that you’ll get turned down again. Inquiries may show up on your credit report right away, so if your credit application is denied, it's best to wait until you know why before applying again and take time to improve your credit scores.
2. Find out why you were rejected. By law, the lender must provide you with a notice with the specific reasons why you didn’t get approved for credit. The reasons could vary by lender, the types of credit requested and your personal credit history.
Common causes include having a limited credit history, too many recent inquiries and a high balance on current credit accounts. You could also be denied for a reason unrelated to your credit, like your income or employment history. However, every situation is different. If you are still unsure after reading the letter, you can contact the lender to find out more.
3. Review your credit score. You’ll get your credit score, based on the one used by the lender. Keep in mind that there are dozens of different credit scoring models out there and lenders may customize the scoring models they use. For that reason, it would be helpful to get a credit score that isn’t customized for that particular lender, so you can see where your credit stands overall.
4. Get your free credit reports. The letter you get will list the credit-reporting agency that supplied your credit report for this particular application and explain how to request a free copy. Take advantage of it. This is an extra free copy that doesn’t count against the free annual credit reports you are entitled to from each of the major credit reporting agencies.
5. Fix any errors on your credit report. Make sure you review your credit report for errors, looking for the following:
- Incorrect personal information (i.e. misspellings, wrong addresses)
- Accounts that don’t belong to you
- Missing accounts that should be listed on your report
- Incorrect public records (i.e. bankruptcies, foreclosures)
- Accounts that aren’t accurate (i.e. they say they’re open when they’re closed)
- Accounts listed as “closed by grantor” (meaning the lender closed the account on you)
- Duplicate accounts
- Data management errors
- Delinquencies or derogatory marks
- Fraudulent activity
- Incorrect inquiries
6. Dispute errors on your report so they don’t continue to hurt your credit. Report your errors directly to the credit bureau where you received your report. You can request a correction online, by mail or by phone. Keep in mind that some disputes could take longer than others. Once you initiate a dispute, the credit bureaus are required to investigate it. Make sure any derogatory marks are removed from your report because they are an influential factor on your overall score.
- Request that a corrected copy be sent to the lender. You can ask the credit-reporting agency to send a corrected copy to any lender who recently received a report with the erroneous information.
- Get your other free credit reports. The three major credit-reporting agencies - Experian, TransUnion and Equifax - don’t share information with each other. Therefore, if you find a mistake on one of your reports, check the other two to make sure they aren’t also reporting wrong information.
Pay close attention to your FICO score. The FICO score is a three-digit number based on the information in your credit reports. It helps lenders determine how likely you are to repay your debt. Many lenders find scores above 670 as an indication of good creditworthiness.
7. Tackle past due amounts. This is crucial to credit repair. Once payment is beyond 30 days past due, creditors and lenders can report your account to the credit bureaus — which ultimately affects your score and creditworthiness. Your goal is to have all your past due accounts reported as “current” or at least “paid.” Late payments can stay on your credit report for as long as seven years.
Once payment is 180 days past due, it becomes “charged off,” meaning you no longer have the option of making regular minimum payments. Being charged off greatly damages your creditworthiness as it remains on your report for seven years.
Maintaining a healthy credit
Paying off your debt is an important element needed to keep your credit status strong. By making payments on time, you’re showing your current creditors and potential lenders that you are a responsible borrower.
- Limit the number of hard inquiries, such as mortgage applications, loans and credit card applications. Too many inquiries in a short period of time can make you seem riskier.
- Keep old credit cards open. Longer credit history means better credit scores. When you close a credit card, your credit card issuer will not send updates to the credit bureaus. Losing that credit history will shorten your credit age and cause your credit score to drop. As a rule of thumb, keep older accounts with on-time payment history open for as long as you can.
- Set up auto-payments to manage your debt. Credit card balances aren’t the only accounts that influence your credit score. Loan balances and lines of credit also affect your level of debt. Make sure your payments are on time, whether you are paying the full balance or just making a minimum payment.
- Maintain a mix of different types of credit. Having a mix of credit account types all at once and paying them off as agreed, can give your credit score a boost.
- Avoid opening multiple new accounts too quickly. New accounts will lower your average account age and can lower your credit scores.
Keep track of your spending
It can be very easy to rack up more debt on your credit card than you can afford to repay, so it's important to be disciplined and in control of your spending.
“One factor that people tend to forget is the credit utilization on their revolving line of credit,” McCormack says.
That’s the ratio of your outstanding credit card balances compared to your credit card limits.
What is a good credit card utilization rate?
It is recommended to keep your total credit utilization rate below 30%.
“That would almost instantly help your credit score. It’s a good indication you are doing good in managing your credit,” McCormack says.
Meanwhile, a higher rate could be a red flag to potential lenders and creditors that you're having trouble managing your finances.
“Once you get to 50% utilization rate, the credit bureau looks at that as a negative. That’s when credit scores start to drop,” McCormack says.