Turned down for a loan or credit card? Profit from your rejection
You can now find out why you've been rejected for a loan or credit card -- and do something about it.
New consumer-friendly regulations created by the Dodd-Frank Wall Street Reform and Consumer Protection Act took effect this summer.
They require lenders to justify their decision to turn you down for credit or refuse to give you the lowest possible interest rate.
That explanation must include the credit scores used to evaluate your application.
Here are five of the most common reasons you can expect to see, and what you can do to improve your credit history and get the loan you want the next time you apply.
Reason 1. You're delinquent on existing loans.
Your payment history on everything from mortgages and utility bills to credit cards and student loans is the single most important factor in getting more credit.
This one factor makes up 35% of your FICO score -- the most commonly used credit scoring system, created by Fair Isaac Corp. (Click here for a complete look at what goes into your credit score.)
So, if you've been late with even one or two bills, it's going to hurt you.
Your credit report will show how often you've missed payment deadlines and how long you allowed a bill to languish before catching up.
A payment that was 90 days late is going to hurt you more than a payment that was 30 days late.
A payment that is past-due right now is going to hurt you more than a payment that was past-due last month but has since been made.
To fix this problem, you'll need to catch up on any past-due bills and create a foolproof system for making all future payments on time.
Do that and your credit score should start improving in about three months. The longer you keep up the good work, the more attractive you'll be to potential lenders.
Reason 2. You've got too many revolving accounts.
This means you have too many credit cards.
The average American has six, so it's not good if you have 13.
Don't immediately jump and close too many accounts. Doing so can further diminish your FICO score, especially if you're closing older accounts that have established your credit history.
Start with the newest cards, with the lowest available credit lines.
Make sure the balance is paid in full, and close the account or transfer the balance to another card.
Tread carefully: As you close accounts, you'll also be diminishing your overall available credit. In turn, that could increase your debt utilization.
Say you have a balance of $3,500 spread over two credit cards, but you have seven other credit card accounts open.
If the total lending capacity of all those credit cards is $20,000, your debt utilization is 17.5%. That's not bad.
But if you close four of those cards and bring your total credit limit down to $7,500, you're now using 46.6% of your available credit. That doesn't look so hot to lenders.
Reason 3. You owe too much on your accounts.
This means you've spent too much of your available revolving credit.
Lenders usually start turning down applicants who have spent more half of the credit limit on their credit cards.
The more you've spent, the more likely you are to be rejected.
The only way you can solve this problem is to pay down some of your debt.
Since all of your credit cards are factored into one number, it really doesn't make a difference which card you choose.
But for your own sake, start with the ones with the highest interest rates.
Another more difficult option is to call a couple of your credit card companies and ask for an increase in your credit line.
Let's say you had $5,000 of debt on five cards with $8,000 available credit. If you were able to increase that available credit to $10,000, it would drop your debt utilization from 62% to 50%.
Reason 4. Your credit history is too short.
The problem with credit is that you usually need a little credit to get credit. Sometimes it can be a challenge getting your feet off the ground, especially when you're young.
If you only have one credit card that you opened six months ago, you just don't have a history yet. It doesn't matter if you're doing everything right, you still may be lagging.
The only thing that can help with this problem is time. Wait six months and apply again. The odds of being approved will increase.
Reason 5. You've had too many recent credit inquiries.
Lenders worry that you might be in some kind of financial trouble if you apply for lots of credit in a short period of time.
Every time you apply for credit, the bank or store pulls a copy of your credit history to review, and the fact that you're seeking more credit is added to your record.
That's one of the reasons we urge readers to resist high-pressure sales pitches for store credit cards.
We know how tempting it can be to "save 30% on today's purchase" just by filling out a credit card application.
But succumb to that kind of marketing a few times, and you may be turned down for the credit you really want when you need it.
Once this happens, you just have to wait a few months before applying again. Credit inquiries can remain on your report for up to two years.
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