You were all ready to go. You checked your credit scores before you put in the application. You’ve been at you job for a few years and you make a pretty good salary. But, the bank called today to give you the bad news: your application was denied.
You tried to listen while they talked about having a co-signer or bringing in an additional down payment, but you couldn’t hear past the disappointment.
Having an application denied can be devastating, especially for your dream house or dream car. It’s even disappointing to be denied for something as simple as a medical credit card to cover a surgery co-pay.
Here’s what you do if you have an application turned down.
Find out why you were denied.
Put your feelings aside for a moment so you can figure out the exact reason or reasons your application was denied. It may be due to your credit, income, debt level, employment history, or something like unexplained deposits or withdrawals from your checking account.
A mortgage or auto lender will often explain the reason for the denial right on the spot. With credit cards or other online applications, you may have to wait to receive a letter in the mail that explains why you were denied.
Knowing why you were denied helps give you the information you need to be better prepared for your next application.
Take a look at your credit.
Negative credit history is one of the biggest reasons loan and credit applications are denied.
Your application can be denied even if you thought your credit was good enough to qualify. For example, this can happen if you pulled your credit score from Credit Karma or an online source other than myFICO.com.
Lenders and credit card issuers have different credit standards, so you can be denied even if you thought your FICO score was good enough.
Having a large amount of debt, past due accounts, or unpaid collections or other public records can stand in the way of you getting approved. Take a look at your full credit report to see what things you need to clean up before you apply again.
If there are errors on your credit report, dispute them with the credit bureau and ask the lender to re-consider your application once the errors are removed.
Watch the mail.
Creditors and lenders are required to send you letter within 7 to 10 days letting you know the reason you were denied.
If you were denied because of something in your credit report, the letter will describe those items and tell you how you can get a free copy of your credit report within 60 days.
You’ll also get an explanation if the denial was because of something unrelated to your credit – like lack of a solid employment history or insufficient income.
Pay off some debt.
High debt balances can lead to denied applications, even if you’ve never been late on a payment.
If you’re already spending a large percentage of your income on debt payments, lenders will be concerned about whether you can afford to take on another monthly debt payment. Getting rid of some debt can help you qualify.
For mortgages, lenders are looking for a debt-to-income ratio below 43%. That means your total monthly debt payments divided by your monthly income should be less than .43. If your debt-to-income ratio is higher than that, you’ll have a much more difficult time getting approved. (Even if you are approved, you may struggle to make payments since you’re carrying so much debt.)
There are credit and loan products for people with different financial profiles. Shopping around with different lenders can give you a better chance of qualifying. But, if your application is turned down by multiple lenders, that’s a strong sign that you should work on your credit and your finances a bit more before applying again.
Applying is a process, so take your denials in stride and use any information you receive to improve for next time. Keep your finances in the best shape possible leading up to any credit application. Bigger loans like mortgage and auto loans will look at your finances and your credit, so don’t make any big life changes until after you’ve been approved.