Have you ever applied for a personal loan or credit card only to be met with a rejection? It can be frustrating and confusing, especially when the reasons provided seem like a secret code. Phrases like "lack of recent installment loan information" or "proportion of balances to credit limits" can leave you scratching your head. But fear not, we're here to decode these reason codes and shed light on what they actually mean, as well as provide actionable steps you can take to improve your chances of getting approved for credit.
Deciphering the Common Reasons for Credit Denials
Let's start by exploring eight of the most common reasons why your credit application may have been denied. Understanding these reasons is not only crucial for deciphering the rejection code but can also help you identify areas where you can improve your credit score.
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Too few accounts currently paid as agreed: This reason can have two interpretations. Firstly, it might imply that you don't have enough accounts for lenders to assess your borrowing risk adequately. Even if you've been paying your bills on time, having just one credit card with a short history might not provide sufficient information for lenders. Secondly, it could mean that you're late on one or more of your debts, making you appear riskier to lenders. To address this, start paying all your debts on time and maintain a clean payment history for at least six months before reapplying for credit.
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Lack of recent installment loan information/insufficient installment loan information: Installment loans, such as personal loans or credit builder loans, contribute to a well-rounded credit mix. If you don't have any installment loans in your credit history or haven't had one active for a while, it could negatively impact your credit score. Consider applying for a small personal loan or a credit builder loan and ensure you pay it off as agreed. This will help diversify your credit history and improve your chances of approval.
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Too many consumer finance company accounts: Consumer finance companies cater to individuals considered high risk by traditional lenders. While these loans can be a way to build credit, having too many of them can make you appear dependent on subpar terms. Work towards paying off some of these accounts and consider seeking loans from banks or credit unions that are viewed more favorably by lenders.
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Recently opened bank revolving trades: Revolving credit accounts, such as credit cards, require responsible management over time. If you've recently opened such an account, lenders may hesitate to extend additional credit until they can assess your creditworthiness. Make timely payments, avoid maxing out your credit limits, and give your accounts time to age before applying for further credit.
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Lack of real estate secured loan information: While this reason doesn't typically arise when applying for a mortgage, it could be a barrier when seeking credit from other lenders. If you're encountering denials because you lack a mortgage, reach out to the creditor and inquire about alternative ways to demonstrate your creditworthiness.
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Lack of recent revolving account information: Lenders prefer to see a mix of credit types in your history, including revolving accounts. If you don't have recent revolving account activity, consider becoming an authorized user on a trusted friend or family member's credit card. Alternatively, explore secured credit card options if you've been denied an unsecured credit card.
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Derogatory public record or collection filed: Negative public records like collections accounts, bankruptcies, foreclosures, and repossessions can significantly impact your credit score and make lenders question your reliability as a borrower. Review your credit reports to ensure the accuracy of the information. If there are inaccuracies, challenge them. For accurate derogatory marks, take proactive steps to address collections and other issues on your report.
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Proportion of balances to credit limits: Credit utilization rate, which represents the amount of your available credit you're using, plays a role in determining your credit score. Higher credit utilization can lower your score. Prioritize paying down credit card and other revolving debt before reapplying for credit. Furthermore, avoid accumulating high balances in the future to maintain a favorable credit utilization ratio.
Understanding Adverse Action Notices and Credit Score Reason Codes
When you receive a rejection for credit, the Fair Credit Reporting Act requires the lender to provide you with an adverse action notice. This notice should inform you that your credit report influenced the decision and list the credit bureau that supplied the report. Additionally, it should include reason codes that elucidate the key factors contributing to the denial.
Adverse action notices serve two important purposes. Firstly, they give you a clearer understanding of why you were denied credit instead of a simple "no." Secondly, they prompt you to review your credit report, especially if there's a possibility of inaccurate information that you can challenge.
Checking Your Score for a Brighter Credit Future
Armed with knowledge about the reason codes and their implications, you can take proactive steps to improve your credit score and boost your chances of future credit approvals. But to navigate this credit journey effectively, it's crucial to have access to the right tools and information.
Consider signing up for ExtraCredit, a platform that provides you with 28 of your FICO® scores, including those used by potential creditors, as well as credit reports from all three major credit bureaus. This comprehensive view of your credit profile empowers you to make informed decisions and take the necessary actions to enhance your creditworthiness.
So don't let credit denials remain a mystery. Decode the reason codes, take positive actions, and pave the way towards a brighter credit future. Remember, with the right knowledge and tools, you can transform rejections into approvals and build a strong financial foundation.
