By Gerri Detweiler, Credit.com
8/10/2012
When an application is turned down, you should know why. Here are some of the common reasons, and what you should do next.
If you’ve never been rejected for credit, count yourself fortunate. Somewhere between 25% and 35% of credit card applications are typically approved, “depending upon the pricing value proposition and other factors,” according to Robert Hammer, the president of R.K. Hammer and Associates, a consultant to the card industry.
With some issuers, the approval rate may be a mere 10% or so.
If you’re not turned down for credit, you may be told instead that you didn’t qualify for the best rate. Either way, if a credit score (or credit-based insurance score) was used in the decision, you must be told the main factors that contributed to your score.
Deciphering those reasons can be maddening, though. “What do you mean, I have no recent revolving balances?” Or, “So it says my account balances are too high. What does ‘too high’ mean anyway?”
Here’s a guide to some of the main reasons you may be turned down — and what you can do about them.
Keep in mind that these are just some of the factors that may be used to evaluate your credit. Not all of them will apply in all situations, and there may be variations on these as well.
‘Proportion of balances to credit limits is too high on bank revolving or other revolving accounts’
What it means: The score likely looks at your total available credit limits and compares them with your outstanding balances, individually and in the aggregate. The greater the percentage of your available credit that you are using, the greater the impact on your scores. There’s no magic number here, though. In other words, getting your balances below 30% or 50% of your available credit doesn’t automatically eliminate this factor.
What you can do about it: Focus on paying down balances that are close to the credit limits as quickly as possible. What about transferring a balance from a maxed-out card to one with a smaller balance? While that might help, it’s not likely, since you still have just as much debt as before (another factor). If you can’t make headway on paying down your credit cards, you may want to talk with a credit counseling agency.
‘Amount owed on accounts is too high’
What it means: This factor may look at your debt in comparison with that of other consumers, and if your debt is higher than optimal, it could show up as a reason why you weren’t approved.
What you can do about it: This one is particularly frustrating because you probably have no idea how much debt is too much, nor do you know which balances to try to pay down first. Typically, though, you’ll get the most bang for your buck, credit-wise, by focusing first on paying down your credit cards with balances that are closest to the limits.
‘Too many recent inquiries in the past 12 months’
What it means: This reason appears when your credit report indicates a high number of credit applications (inquiries) within the past year. But not all are counted the same. Checking your own credit reports doesn’t count; nor do promotional inquiries, inquiries from employer and insurance companies, and account reviews by your current creditors. The impact of inquiries on your credit will vary, depending on your overall credit profile, but the typical inquiry can be expected to affect your score by about five points.
What you can do about it: This reason is more likely to appear when you have a limited credit history or strong credit, simply because there are fewer other significant negative factors affecting your scores. But it doesn’t hurt to lay low for a while. Avoid opening new retail cards. While inquiries resulting from shopping for a mortgage, student loan or auto loan aren’t as likely to hurt your score as the same number of inquiries for credit cards, limit your applications to a short period of time, such as 14 days.
‘Level of delinquency on accounts’
What it means: Delinquency refers to payments that were late. The general rule of thumb is that the further you fall behind, the greater the impact on your credit score.
What you can do about it: If the information is inaccurate, you can dispute it. If it’s correct, you’re going to have to live with it for a while; usually up to seven years. Focus on making your current payments on time. If cash is tight, remember that all you have to do is make the minimum payment on time to avoid a delinquency on your report.
‘Time since delinquency is too recent or unknown’
What it means: Recent late payments will have a greater impact on your score than older late payments. Typically, delinquencies within a year or two will hurt your scores the most. If an account was delinquent a while ago but the credit report doesn’t indicate the date, this factor can pop up as well.
What you can do about it: The good news is that as time passes, these delinquencies will carry less weight, especially when you are paying current bills on time. But the date is important here. If an inaccurate date (or no date) is reported for a charge-off or collection account, for example, make sure you dispute that with the credit-reporting agency.