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Nothing is more frustrating than applying for a home or car loan, credit card, or other line of credit and having your application denied. There are several reasons why a person could be denied credit. It could be because of insufficient income, too brief a period of employment, too many credit obligations, negative and derogatory credit report information, no checking or savings account, and so on.
When you have been turned down for credit, the creditor must notify you in writing within 30 days of the denial. In the denial letter, it must indicate the reason for the denial and the name and address of the credit re porting agency used to review your credit report.
Once you have received the letter of denial, you have 60 days to request a free copy of your credit report from the credit reporting agency listed. (The reporting agencies are required to give a free report to anyone who was denied credit based on their reports.) Don’t try to get a free report from a credit reporting agency that is not notated in the letter. The credit reporting agencies have a record of the inquiry in their system from the creditor who denied you credit.
The letter of request for your free credit report should include your name, address, Social Security number, and birth date. Attach a copy of your letter of denial with your request letter. You should receive a copy of your credit report within 14 days. Review the credit report. Contact the creditor who denied you credit to see exactly what the problem is and how to resolve it. Once you know the problem is resolved, you can reapply or go to a different institution.
Linda emailed us with a question regarding a purchase she recently made. She asked: “I was recently turned down by my bank for a car loan I have excellent credit I was very upset about being turned down so I went to another bank and was approved. Was I being discriminated against by the first bank?”
Our answer was: The first bank that rejected your credit application is required to send you a letter of denial stating the reason your application was denied. This letter must be sent to you within 30 days of your rejection. Different creditors have different criteria in qualifying you for credit Each bank, savings and loan, credit union, and credit card agency has a credit scoring system that it uses It assigns a certain amount of points for each entry on the application If the points are not high enough, the application will be denied When the second bank approved your application, it may not have had as strict guide lines for qualification as the first lender did and that is why you were approved for the loan by the second bank Also some banks are more aggressive than others in soliciting customers.
When qualifying for credit there are other things besides your credit report that the lender is looking at your income, job stability, loan amount, and assets all play an important part when qualifying for credit.
We do not believe that you were being discriminated against. We believe the first bank had stricter qualifications than the second bank, forcing you to look elsewhere.
Q. My husband and I are trying to purchase a car. I am a home maker. My husband has been out of work two times within the past three years. He is employed now. We keep getting turned down for a car loan. What is the problem?
Lenders look for several factors when making an evaluation for granting credit. One big factor is job stability. If a lender can’t establish two years of continuous employment, it may decline the application. Because you are a homemaker with no income, the lender can’t look to you to sup port a stable income.
If your husband went from one job to another without an interruption, and the job was in the same line of work, the lender would consider approving the loan. If he changed his line of work and started a new job, this could present a problem.
In the future, keep records of the name, address, telephone number, dates of employment, and salary from all previous employers. (In these days of closings, mergers, and buyouts, keeping pay stubs could be a good idea.) This information will allow the credit grantor to verify information and approve your application.
TOO MANY CREDIT CARDS
Q. We have always taken great pride in our good credit rating.
Recently we applied for a credit card and they declined our application. We have several credit cards that we always pay on time. Why did this happen?
When a credit grantor is reviewing your credit application, they also are reviewing your credit report and your income. If you have several credit cards with outstanding balances the credit grantor will evaluate your debt to your income. The credit grantor will calculate your monthly fixed payments, such as your rent or mortgage, automobile, bank installments, charge/revolving accounts, child support, your proposed loan payment, and any other expenses you report. Once the monthly expenses are calculated, a calculation of your gross monthly income (before taxes) is tabulated. Your salary, spouse’s salary, commissions, bonuses, alimony, child support, retirement income, and any other source of income is calculated.
To calculate the debt-to-income ratio you would total the monthly payments (expenses), and divide the monthly payments by the total gross monthly income. This will equal your debt ratio. If the ratio is over 50 percent, the credit grantor may not approve the loan.
Your problem may be that you have too much credit and not enough in come. If you have open accounts with no balances, it will be counted against you. The credit grantor will assume that in the future you may use the unused credit and run up your debt ratio. Close all open accounts that you are not using. Write a letter to each of the creditors requesting that they permanently close the account. If you are in possession of the credit card, cut it up, and mail it with your letter canceling the account.
Sometimes accounts shown on your credit report may have been closed but they are still showing up as active accounts. This also is misleading to the credit grantor. Make sure that the creditor is contacted and the account reflects closed.
Q. Recently I applied for a credit card. The credit card company sent me a dental letter. I called the company back to see what the problem was. The person I spoke with said he couldn’t verify my telephone number. Our telephone number is unlisted.
The individual I was talking to said he would call me right back. He called me right back at the telephone number I gave and said I was approved. What was that all about?
Many credit card companies will not approve a credit card or line of credit if your telephone number is unlisted.
The reason is that there is a higher risk of not being able to find you if you default on your payments. Many credit applications now request a copy of your current telephone bill with your telephone number listed on it. This is cross-referenced to your name and address.
If your telephone number is unlisted, to eliminate a problem when applying for credit, attach a copy of your telephone bill with the application. This will eliminate a delay or denial of your original request.
Many applications require that you list references such as relatives or friends. This is not to see who you know. It is to use as a reference and contact if you quit making your payments and your line of credit goes into default. If you have changed your telephone number or address and the creditor can’t locate you, the individuals listed on the application will be contacted to try and get information on your whereabouts.
NO ACTIVE ACCOUNTS
Q. I have had great credit in the past. I paid all my accounts off two years ago. I went to apply for a new credit card and was turned down. The letter the bank sent me said “No previous bank borrowing within the last 24 months.” What does that mean?
Most lending institutions and credit card companies are looking for your past 24 months’ payment history. The past 24 months is a good indicator of how stable your financial situation is and how you pay your bills.
The credit grantor is reviewing your credit report to see what accounts you have had in the past. By paying off all your credit obligations, no payment history will be reported on your credit report. The credit report will indicate the last date of activity.
If there have not been any payments made on any accounts within the past 24 months to show a payment pattern, many lenders will decline the application.
When applying for credit, it is important to do your homework and analyze what a lender will look for in qualifying you for credit.
Paying off your credit cards is great. It would be wise, however, to keep one or two accounts open and pay the balances off each month. That way there will always be a payment pattern should you seek additional credit.
Q. I have been self -employed for more than four years. I am having trouble getting new credit. Why is this happening to me?
Individuals who are self-employed have greater difficulty in getting credit than individual who have an employer. The reason is that your in come is harder to verify than someone who is an employee.
Most self-employed people write off numerous expenses on their tax returns, which off-set their incomes. You may have a steady cash flow, but a creditor reviewing your 1040 Federal tax return may think the income appears very low due to your write-offs on your Schedule C IRS form.
Being self-employed has added risk to the lender because your income flow is not consistent. Many people who are self-employed have had poor credit history because their income is not stable.
To get credit approval, you must be self-employed at least two full years. Make a photocopy of any 1099 Forms that you receive and attach the forms to your application. This will boost your income. If you are contracted with any specific companies to do work for a specific time, list the company on the application and the income you are receiving.
If your company is incorporated, make sure the income you are receiving can be verified with your pay stub or yearly W2 forms. Do your home work before applying for any credit. Find out what the criteria is from the lending institution before you send in your application. If you can provide the required documents, don’t hesitate to apply. If you fall short, gather the necessary information that will be required before you reapply.
Q. Five years ago, I filed for a bankruptcy. I was told that I could get new credit without ally problem. I have been trying to get new credit but 1 am constantly being turned down. What happened to the fresh start that I thought I could get?
Unfortunately most people think that once they file for bankruptcy their problems are over.
A bankruptcy is a public record that is recorded and picked up by the credit reporting agencies.
It has been said that some creditors will give you credit because you can’t re-file for a bankruptcy for at least seven years. However, most individuals I have talked to have found this to be untrue.
Creditors want some distance between the time the bankruptcy was discharged to the time of application. Most lenders will not consider looking at an application for at least two years from the date of discharge.
If there has been any negative activity on your credit report since the bankruptcy you will be denied credit.
Several new companies are now offering lines of credit for individuals who have gone through a bankruptcy. Many of these companies have access to mailing lists of people who have filed bankruptcies. If you receive an application, review it carefully to determine what the fees are. These types of credit are usually very expensive with high fees and high interest rates.
Q. Two years ago the Internal Revenue Service filed a tax lien against me. All of my credit is good except for the tax lien that appears on my credit report. I need to refinance my house and have been denied the loan. What can 1 do?
A lien that has been filed against you is recorded at the county clerk’s office and becomes a public record. A lien could be a tax lien, mechanic’s lien, or judgment. When you have a lien filed against you and still owe money on it, most lenders will not issue you any type of credit.
The lien represents an unpaid bill that has been attached to your property. If you have a first mortgage on your home and try to sell or refinance your property, the lien must be paid off prior to the sale or refinance, or through the escrow. The reason it must be paid is because if the mortgage loan is paid off, the lien would move into first position. A loan company trying to put a new loan on the property is not willing to be in second position to a lien. The risk is too high for the company. The lien holder could force a sale of the property to enforce payment of the debt.
The best solution is to make an agreement with the IRS to make installments or make an offer-in-compromise to reduce the amount you would owe. Another suggestion would be to see if the lien holder would subordinate its position to enable you to get a new first mortgage. You should seek the advice of your accountant or tax attorney.
Once you have solved your tax problem and paid off the tax lien, it is important that you get a release statement from the IRS. This must be a written statement indicating that the lien has been paid in full. Make sure this is recorded with the county clerk’s office. Mail a copy of the release to all the credit reporting agencies so their records can be updated. This will make it easier for you to get credit in the future.
Q. Why are excessive inquiries hurting my chances of getting credit?
Five or more inquiries within a six-month period may hurt your chances of establishing new credit. Credit scoring is a big factor in qualification. Too many inquiries within a short period of time will lower your score.
For example, if you were trying to get a car financed through Ford, and they ran a credit report and denied your credit application, an inquiry would appear. You then go to Chevrolet, and they run a credit report. The Chevrolet dealer notices that you have just come from Ford, which may cause a denial of your credit application based on the denial from Ford. You then go to Toyota , and they run a credit report on you and see that you have been to Ford and Chevrolet. Toyota may question your credit report and deny you credit based on the inquiries by Ford and Chevrolet. This can go on and on with inquiries. The more you have listed on your credit report, the more questionable you are to the creditor.
The best way to avoid excessive inquiries is to be prepared when applying for credit. Have an updated copy of your credit report on hand to show the merchant. If you are applying for a car loan or a line of credit where you can personally show the credit grantor a copy of your credit re port without authorizing the company to run a report on you, do it. Excessive inquiries could be avoided. If the company acknowledges that you would be approved, allow the company to run a new credit report on you. The company will have to in order to complete the loan.
If the company determines you would not be approved you have saved an inquiry from being posted on your credit report.
Inquiries are automatically removed from your credit report two years from the date they were made.
NO CREDIT HISTORY
Q. I have always paid cash for everything. Now I am trying to get a credit card and I can’t. Isn’t it better to pay cash than to use credit?
Paying cash for everything is a good habit, although paying only with cash will not help you establish credit. A credit grantor looks at your credit report to see your paying habits. By using cash you show no payment history.
In today’s society you cannot function without establishing credit. Without established credit you would not be able to purchase a home or car unless you paid all cash. You can, however, have credit without having debt by paying off your credit card balances in full when your statement comes due. This is a good practice, plus it would be reported on your credit report as payments made on time. This will result in establishing a positive payment history and can be beneficial when trying to qualify for a mortgage.
No credit is just as bad as having negative credit. You will be denied credit either way. We will later discuss ways to establish credit.
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