5 Moves to Make If Your Loan Gets Denied
You needed an auto loan to finance that new convertible. Or maybe you applied for a mortgage loan to buy your dream home. Whatever type of loan you needed, the answer was the same: A big "no" from your lender.
Lenders reject loan applications for a variety of reasons, but two stand out: Borrowers either have a low credit score, or they're already paying off too much debt each month.
Fortunately, you can take simple steps to strengthen your finances and turn that loan rejection into an approval. Here are five moves to make after your loan gets rejected to qualify for that financing:
1. Order Your Credit Score
Your FICO credit scores are key when you're applying for a loan. You have three of them, one each generated by the national credit bureaus of TransUnion, Experian, and Equifax. These scores tell lenders how well you've managed your credit in the past. If you have a history of paying your bills late, running up credit card debt, and missing payments altogether, your FICO scores will be weak. Lenders consider a FICO score of 740 or higher to be a strong one. But if your score is too low — say, under 640 — you'll struggle to qualify for loans. And when you do qualify for a loan, you'll have to pay a higher interest rate.
Before you re-apply for a loan after a rejection, order at least one of your FICO credit scores. Lenders are also required to provide you with a copy of your score if that’s the reason you were denied the loan.
2. Order Your Credit Reports
You should also order all three of your credit reports, maintained by each of the credit bureaus. These reports list your personal information and detail your history of managing credit. They show how much you owe on credit cards and other loans, and any missed or late payments from the last seven years. They'll also list any negative judgments, such as bankruptcies or foreclosures that are up to seven or 10 years old, respectively. You can order each of your three credit reports once a year for free at AnnualCreditReport.com.
Once you receive your reports, check them for mistakes. A single mistake on a credit report can send your credit score tumbling. If your report lists a missed car payment that you know you made on time, correct the error by contacting the offending credit bureau through email or by phone. Correcting an error can provide a quick boost to your credit score. Make sure, though, that you can provide documentation, such as a credit card statement or bank account record, proving that you actually did pay the "missed" payment on time.
3. Pay All Your Bills on Time
The best way to boost a weak credit score is to start a new history of paying all your bills on time. Your bill-payment history accounts for 35% of your credit score, according to myFICO.com. Paying your bills on time will cause your score to rise. But this takes patience. Depending on how weak your score is, it might take you several months, or even more than a year, to boost your score to a level acceptable to lenders.
4. Reduce Your Monthly Debt
Lenders often reject loans when borrowers' debt-to-income ratios are too high. In general, lenders want your total monthly debts — including the estimated amount you'll be paying each month for your new loan — to equal no more than 43% of your gross monthly income. If your debt-to-income ratio is higher than this, you'll greatly increase the odds of receiving a rejection on your loan application.
The easiest way to improve a debt-to-income ratio that is too high is to pay off as much of your debts as possible. Usually, this means reducing credit card debt. Paying off the amount you owe on your cards will slowly but steadily cause your debt-to-income ratio to fall.
5. Keep Paid-Off Credit Cards Open
Say you pay off a credit card entirely and you no longer plan on using it. You should close that account, right? No. Never close unused credit cards. Cards with zero balances can actually help your credit score.
That's because lenders look at something called your credit-utilization ratio. This ratio looks at how much of your available credit you are using. The lower this ratio, the better. Closing an unused credit card will instantly hurt this ratio.
Say you have four credit cards, each with a credit limit of $4,000 for an available credit of $16,000. Say, too, that you have $5,000 worth of credit card debt. That comes out to a credit-utilization ratio of about 31%, $5,000 divided into $16,000. But say you close one of your four cards. That reduces your available credit to $12,000. Your debt-utilization ratio immediately jumps to about 42%, $5,000 divided into $12,000.
It's okay to keep a paid-off credit card in your wallet. Just make sure that you don't run up another hefty balance on it.
Have you ever had a loan app denied? What did you do after?
Tagged: Personal Finance, applications, bad credit, building credit, credit score, debt, denied, fico, line of credit, loans, rejection
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