Dealing with Credit Denial

Bills.com explains credit criteria and how to respond to denied credit

SAN MATEO, Calif., Nov. 8, 2006 - Borrowers who worry about credit denial are not alone -- in 2005, 27.1 percent of mortgage applications were denied, and other types of loan applications also risk denial. Credit denials can happen for any number of reasons, said Brad Stroh, co-CEO of Bills.com, an online consumer finance portal based in San Mateo, Calif., but knowledge and action can prevent denial from recurring. "Financial problems can happen to anyone," said Stroh. "First, understand what caused your credit request to be denied, so you can avoid the same situation next time. Second, educate yourself about the results of denied credit. These steps will help protect you from the negative effects of poor credit."

What causes credit denial

Creditors are in the business of lending money, Stroh explained. To ensure a return on their money, they establish criteria to determine to whom they will lend. Creditors might deny credit to borrowers for reasons including:

  • Low credit score - Most creditors review borrowers' FICO scores, which typically range between 300 and 850, to help determine a person’s likelihood of repaying debt. That score is calculated based on several factors, including:
    • Repayment history - A history of not paying debts, or not paying on time each month, will lower scores.
    • Amount of credit used - Credit lines near their limits, or maxed out, negatively affect credit scores.
    • Amount of overall debt - Too much debt makes it less likely additional debt could be repaid. Too little debt offers creditors limited payment history, making it difficult to judge credit worthiness.
  • Job history - A borrower hasn't been employed long enough.
  • Income - Creditors will match income levels with their standards.

Borrowers' rights when denied credit

Borrowers have a legal right to know why their credit request was denied.

  • The Equal Credit Opportunity Act requires creditors to reveal the reasons they did not give credit.
  • The Fair Credit Reporting Act requires lenders to provide the name, address and phone number of any credit reporting agency whose information was used in obtaining information about an applicant's credit. Borrowers have the right to receive their credit report for free when they are denied credit because of their credit report. Note: The credit report must be requested within 30 days of the denial.
  • The Fair Credit Reporting Act gives consumers the right to request and receive a free credit report from each of the three credit reporting agencies (Equifax, Experian and TransUnion) once every 12 months. Request reports by visiting www.annualcreditreport.com or calling 1-877-322-8228.

What to do when credit is denied

"Most creditors actually want to help you obtain credit," Stroh said. "If you are denied, ask your lending representative why, and what you can do to change your situation."

  • If the reason was job history, find out the length of time at one job that is required to qualify.
  • If credit cards were maxed out, work to pay off some cards before reapplying.
  • If the reason was too much debt, develop a budget to pay it down, month by month. Pay down the debt with the highest interest rate first. When it is paid off, pay down the debt with the next highest interest rate. Continue until you are debt-free.
  • If income levels were too low, consider buying a less-expensive item. Or consider taking a second job to earn additional money. In both cases, before changing your lifestyle, be sure to check with the lender to see what criteria must be met. For instance, you might need to keep a second job for at least six months to qualify.
  • If the reason was credit report errors, request the error be corrected. Send a written request to the credit reporting agencies that are reporting the error. Corrections can take up to 45 days. Ask that a corrected report be sent to creditors who have received the report during the last six months, or employers who have received the report within two years.
  • If the credit report shows fraud (charges or accounts you did not open), place a fraud alert on your report. Detailed information on how to do this is available from the Federal Trade Commission at http://www.consumer.gov/idtheft/con_steps.htm. Victims of identity theft must take additional steps to protect themselves.

"Being denied credit can be troublesome, but remind yourself that credit approval is based on a mathematical formula," said Stroh. "When you eliminate the skeletons in your financial closet, you'll be on your way to an approved request next time." Based in San Mateo, Calif., Bills.com is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and save money by choosing the best-value products and services. Since 2002, Bills.com’s partner company, Freedom Financial Network, has provided consumer debt resolution services, serving more than 10,000 customers nationwide and managing more than $250 million in consumer debt. The company’s co-founders and CEOs, Andrew Housser and Brad Stroh, were recently named Northern California finalists in Ernst & Young’s 2006 Entrepreneur of the Year Awards.