Being denied credit is disappointing, and it can also severely limit your financial flexibility. For example, a credit denial could make it more difficult to purchase a vehicle, obtain a mortgage or be approved for an apartment lease.
Having a credit card denied can be especially damaging financially. Credit cards are a useful tool used by many people to manage their finances more efficiently, so a credit card denial could throw a serious wrench into your financial plans.
Here are five steps to consider taking if you’re denied credit.
1. Investigate Why
Credit issuers are required by law to explain in writing why your credit application was denied. This written communication is referred to as an adverse action notice. The notice must indicate which credit bureau (Experian, Equifax or TransUnion) provided the credit report that was used in making their decision and what your credit score was, along with the main factors contributing to your score.
Note that your credit denial could be due to something unrelated to your credit report, such as your income, or employment history. This is legal as long as the reasons aren’t considered to be discriminatory.
2. Review Your Credit Reports
If you were denied credit due to information on your credit report, it’s your right to see the information to understand why.
Review your credit reports from all three bureaus and identify any errors or misinformation, such as an account you didn’t authorize.
Dispute any error immediately with the credit bureaus and then ask the bureau to resend your credit report to the issuer that denied you. You can then ask the credit issuer to reconsider your credit application.
3. Don’t Apply for Credit Again Right Away
Unless there were errors on your credit report, it’s generally best to wait a little while before applying for credit again. This is because additional inquiries on your credit report may indicate desperation on your part to the credit reporting bureaus, which could further damage your credit score and your ability to obtain credit at some time in the future. Remember, hard inquiries account for up to 5% of your total credit score, so you want to keep them to a minimum.
So how long should you wait before applying for credit again? The answer depends on several different factors, including the reasons you were denied credit.
For example, if you were denied credit because there were too many hard inquiries on your credit report, you should generally wait at least four to six months. But if you were rejected because your credit scores were too low, wait until you’ve taken the steps to identify and address the factors that may be negatively affecting your scores (outstanding debt, payment history, etc.)
4. Consider Applying for a Secured Credit Card
With this type of credit card, you’ll make a refundable security deposit when applying that serves as collateral for your credit line. This lowers the credit issuer’s risk, which increases the chances that your credit application will be approved.
Your credit limit is usually the same amount as your security deposit, though some card issuers offer higher limits than security deposit amounts. If you fail to pay your credit card balance, your security deposit will be used to cover the amount due. After you’ve made on-time payments for a period of time, such as 12 months, the card issuer may convert your account to an unsecured card and return your security deposit.
5. Consider Applying for a Retail Store Credit Card
These cards are often easier to obtain than major credit cards, even for people with low credit scores or income. Paying on time every month could help you qualify for a major credit card later.
Keep in mind that retail store credit cards usually feature higher interest rates than major credit cards so they could end up being more costly. So pay off your balance in full each month to avoid incurring high interest charges.
Don’t Be Discouraged
Being denied a credit card or loan isn’t the end of the world from a credit standpoint. By following these suggestions, you can improve your chances of being approved the next time you apply.