Rejected for credit: When to take no for an answer
If you keep getting turned down, it's time to make some adjustments
Sometimes, when applying for a new credit card or loan, the answer is no, you can’t borrow any (or any more) money. And while the negative response can be crushing, the wrong reaction can cause you to fall into the rabbit hole of sinking credit scores, subprime products and more debt than you can realistically handle.
Getting rejected for a credit card or loan isn’t that uncommon. Recent results from the Federal Reserve Bank of New York Survey of Consumer Expectations survey revealed that denials for all credit types – from credit cards to home loans – are up. The rejection rate per application increased from 29.5 percent in June to 39.3 percent in October.
So instead of taking offense, pursuing yet another disinterested creditor, or borrowing from one of the bad guys, here’s what to do instead:
the reasons for a rebuff.
Most lenders depend on consumer credit reports and the credit scores (such as FICO and VantageScore) that are derived from the information listed on them to make qualification decisions. Credit scores range from 300 to 850. If your scores are on the low end, you appear to be a high-risk customer, making rejection likely.
“People have unrealistic expectations,” says John Lie-Nielsen, CEO of One Park Financial, a company that offers financing to small-business owners. “They don’t realize how risky they are. Most are tuned down because they haven't paid attention to their credit situation.”
Seemingly minor problems on a credit report can result in instant rejection. “Collection accounts, delinquencies, things you may not think is a big deal is to a lender,” says Lie-Nielsen. “A $400 Macy’s bill that goes to collection can have a really big impact.”
Credit counselors are constantly explaining to clients why their quests for credit products are being refused. Bruce McClary, vice president of public relations and communications for the National Foundation for Credit Counseling, says that a record of past-due payments with current creditors is a serious factor. “If you’re falling behind, it will have a very significant negative effect on your credit rating,” says McClary.
Weak, sporadic or nonexistent earnings also play a major part. When combined with an overabundance of financial obligations, though, rejection is all but guaranteed. According to Wells Fargo Bank spokeswoman Natalie Brown, applications are typically declined because consumers have too much debt relative to their income. “That would suggest they might have a difficult time repaying,” says Brown. One more credit card could put you over the edge and into insolvency.
Another reason for credit rejection is no established credit history. “The creditor needs something to go on” says McClary. “If you have no record yet, they can’t make an accurate judgment call.”
pause on the process.
So what do you do when the credit denials start to flow? “Beyond a couple of rejections, stop applying completely,” says McClary. “When people get rejected, it’s common for them to try and try, go from lender to lender, banging their heads against the wall and then always getting the same result.”
However, hitting the brakes is not always intuitive, especially when you need capital to keep your business afloat. Casey Tibbs, from central Illinois, says he’s been trying to consolidate personal liabilities and obtain a commercial loan to solve cash flow issues for his marketing company. “The personal debt hampers my ability to get a commercial loan, while also making it difficult to get a personal loan,” says Tibbs.
Take a more detailed look into your credit. Talk to a credit counselor who will review everything with you for free; who will leave no stone left unturned. There may be things going on that are giving lenders pause that you can’t identify on your own.
|— Bruce McClary
National Foundation for Credit Counseling
Too many attempts at getting credit are lowering Tibbs’ chances. Applications for credit are noted as hard inquiries on credit reports and calculated into credit scores. While a poor payment history and excess debt are the biggest credit score destroyers, inquiries also have an impact. Pursuing credit cards and loans, particularly when the attempts are prolific and in close succession, will cause scores to drop, making it more difficult to be be accepted.
“My credit score has been steadily going down,” says Tibbs. “I used to have 730 and above. It’s always been easy to get credit because my credit was great. So I thought I could get commercial loans. It caught me off guard. All the inquires for the credit cards stack up. I’ve missed payroll now, missed credit card payments. My credit is suffering.”
Don’t take credit rejection personally.
Over time, credit denials can be demoralizing. “You go to the bank, try to get the loan, and they all roll their eyes and scoff,” says Tibbs.
According to Josh Brown, an attorney for Ark Law Group, which specializes in providing financial relief to distressed homeowners and consumer borrowers, it “can feel like a slight when getting rejected for a credit card, but there's no reason for a borrower to take it personally.” Credit acceptance is based on basic business principles. You, as a person, aren’t being rejected.
McClary suggests considering denials as a gift, not a curse: “It’s a signal that borrowing is not the thing to do. Each lender has a certain set of standards, and you’re not meeting them now. That doesn’t mean you can’t try later when you’re in a better position. Or maybe you’re just looking at the wrong credit card or loan and one is actually available to you.”
In fact, a “no” may actually be a soft “yes,” so listen to the lender carefully. It may not be as bad as you think.
“We want to put them in a product, but sometimes we make an offer they don’t expect,” says Lie-Nielsen. “They want $250,000, but they get $20,000. It’s perceived as a rejection, but it’s not. I’m shocked by how many people just get angry and hang up the phone. They don’t ask why! Take the emotion out of it and use it as a learning experience. I can’t say you can’t have an emotional response, but I encourage you to find out what is causing lenders discomfort.”
the damage that is giving creditors pause.
Before applying again, pull your credit reports from AnnualCreditReport.com and your scores to see where you stand. FICO scores are available at MyFICO.com for about $20 and many credit card issuers and personal finance websites such as CreditCards.com offer VantageScores at no charge. Contrary to popular belief, checking your own credit scores won’t impact your credit rating.
“If you’ve been turned down for a credit product more than once, you have to analyze the situation, and then make some adjustments,” says McClary. “Take a more detailed look into your credit. Talk to a credit counselor who will review everything with you for free; who will leave no stone left unturned. There may be things going on that are giving lenders pause that you can’t identify on your own.”
Lenders are required to send an “adverse action letter” which lets applicants know why they were rejected. “If a borrower doesn't hear back within a few business days, they should call the credit card issuer.” says Josh Brown. You need to understand what’s wrong so you can right it.
“You could be rejected because of a mistake,” says Brown, citing a 2015 Federal Trade Commission study that discovered that one in five people had errors on their credit reports. Identity theft has been and continues to be a major problem. Fraudsters can ruin your credit by applying and borrowing in your name. Dispute all inaccurate information with the credit reporting agencies immediately.
After that, boost your credit scores with positive action, says Natalie Brown. “A higher score (especially above 760) can give a consumer more options – and better rates.”
Aside from paying your bills on time and maintaining low balances, Brown also suggests keeping unused accounts active by charging small purchases and paying them off at the end of the month. That way, you have more available credit, which not only keeps your credit utilization in check, but will lengthen your credit history.
with the good guys.
“If the first stop is with a prime lender, the instinct is to go to the next most likely creditor that will say yes,” says McClary. “Then if they say no, you’ll work your way down the food chain.”
The subprime lending industry caters to people who’ve been blocked from quality loans and lines of credit because they’ve had troubles with delinquencies, defaults, collection activity, foreclosures and bankruptcies. What then becomes available? Accounts with high interest rates, costly fees and serious penalties. If that is your only option, it becomes your turn to walk away. Another loan may the last thing you need, especially when it comes with such terrible terms.
Consider a secured credit card with a reputable credit issuer instead. In general, as long as you have an income, you should be eligible for at least a small line of credit with a secured card. A refundable cash deposit with the bank is required, which secures the credit line. If you charge up the account and then default, the issuer can claim the funds, but if you manage it well by charging small amounts and paying in full by the due date, eventually you’ll improve your credit scores. Once they're high enough, you’ll have access to larger credit lines and qualify for premium unsecured products.
Even better, you’ll steer clear of expensive payday lenders, title loans (which allow you to borrow against the value of your car, but if you skip payments the vehicle is at risk of repossession) and pawnshops. “You don’t want to head down that slope!” says McClary. “You’ll regret it. Sometimes a no is better than a yes.”
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