This article provided by the National Foundation for Credit Counseling (NFCC)
People apply for a credit card for many different reasons. Some are new to the world of credit and just getting started, while others are hoping to expand their access to credit. Regardless of the reason, no one applies for a card hoping their application will be rejected. To improve the likelihood of approval, consumers need to understand the credit decisioning process.
“Each lender has different criteria for extending credit. Therefore, consumers should do their research in advance, and only apply for the cards that are likely to grant the credit they seek,” said Gail Cunningham, spokesperson for the National Foundation for Credit Counseling®.
The NFCC provides the following 10 reasons a credit card application could be declined, along with the steps consumers can take to correct the problem. The list is not inclusive, but will help borrowers better understand the review process and how to position themselves to increase the likelihood of credit being extended.
- Not enough existing credit – Lenders prefer being able to review a track record of how a person has managed credit in the past. A thin or nonexistent credit file can give a conservative lender reason to deny.
What to do – Judiciously build credit, perhaps starting with a secured credit card, but confirm in advance that the issuer reports activity to the credit bureaus. Also consider becoming an authorized user on another person’s card, as the activity of the primary cardholder as well as the authorized user is reported to the bureaus.
- Poor pay history – The highest weighted element in the scoring model is how a person repays his or her debt obligations. A history of skipped or late payments can be a knock-out punch when attempting to obtain new credit.
What to do – Identify any issues by obtaining the credit report for free at AnnualCreditReport.com. Next, start making payments on all accounts including those that are past due. This begins building a positive history and helps to establish creditworthiness.
- Existing credit lines maxed out – Creditors don’t like to see that a person is utilizing all of their available credit, as this can signal that they are living on credit and opening a new line will only increase current indebtedness.
What to do – Pay down credit card debt to equal no more than 30 percent of available credit. Credit utilization is the second highest weighted element of the scoring model, so lowering debt could also benefit the credit score.
- Overall debt is too high – A person’s debt-to-income ratio is a reflection of how much is owed relative to their income. People have expenses beyond credit cards, thus lenders take all existing obligations into consideration.
What to do – Increase income or decrease debt. The important thing is to not appear that more is owed than can be responsibly managed.
- Too many inquiries – It’s a red flag if a person is attempting to obtain too much credit at one time. Too many inquiries or recently opened accounts can make a lender reluctant to give the person another chance to spend.
What to do - Only apply for the number of cards that are necessary and are appropriate for your financial situation. If declined, do not continue applying. Instead, take steps to remedy the reason for the rejection. Wait a few months to reapply, as that will give the credit report time to update.
- Serious negative notations – Unpaid tax liens and Chapter 7 bankruptcy can remain on a credit file for up to 10 years. Foreclosure, late and missed payments, collection accounts and Chapter 13 bankruptcy can remain for seven years.
What to do - The further a person moves away from the date of the negative activity, the less impact it has on credit decisions. A person doesn’t need to wait until the activity rotates off the credit report, but putting distance between the harmful information and applying for new credit is helpful.
- Insufficient income – Although often not made public, issuers have minimum income limits that must be met in order to grant credit.
What to do – Research which cards are more likely to grant credit to people with low incomes. In the absence of other eliminating factors, getting a part-time job to supplement the primary source of income should enhance the likelihood of credit being extended.
- Unstable job history – Recent unemployment or consistent job hopping indicates an unstable income, thus putting a person at risk of default in the lender’s eyes.
What to do - Make steady employment a priority. Changing jobs within the same field may not weigh as heavily against a person, particularly if it is a promotion.
- Too young to apply – Applicants must be a minimum of 18-years-old to apply for a credit card.
What to do – As a result of the Credit Card Accountability, Responsibility, and Disclosure Act, Americans must be 21-years-of-age to independently receive credit unless they can prove ability to pay or have a co-signer. It is not a bad idea for a young person to learn to manage money by living on a cash basis or using a debit card before applying for credit.
- Errors on the application – Credit card applications can be long, making it easy to inadvertently skip completing all areas.
What to do – Avoid unintentional errors by filling out the application online, as these forms often do not allow a person to submit until all required fields are complete.
“When applying for credit, ask yourself if you would loan money to you,” continued Cunningham. “If the answer is ‘no,’ then it’s likely the financial institution won’t either. That’s the signal that it’s time to take action and improve your credit profile. Credit card companies want to extend credit, but only to people who represent a low risk for default as defined by their business model.”
If denied credit due to information contained in the credit report, the Fair Credit Reporting Act requires lenders to send the applicant an adverse action notification which includes the reason for the denial. To be in a better position for approval next time, review the reasons for the rejection and take the necessary corrective steps.
If you need assistance obtaining and understanding your credit report, MMI is proud to offer one-on-one Credit Report Reviews. A trained counselor will help you pull your report, review the information - including your current score - and provide action steps to help you start building a more positive credit history.