A rejected credit card application stings — but perhaps not as much as the letter you get afterward, full of vague and unsatisfying reasons for the denial.
These letters, called “adverse action notices,” are required by law to help consumers understand why their application was rejected. But they often raise more questions than they answer. You might be told that your income falls below the “minimum requirements,” without knowing what those requirements are, for example. Or you might find out that your financial obligations are “excessive” in proportion to your income.
[See: How to Live on $13,000 a Year.]
Although credit card issuers are required to disclose the main reasons for a rejection, they “need not describe how or why a factor adversely affected an applicant,” according to the Federal Deposit Insurance Corp.’s interpretation of Regulation B, a part of the Equal Credit Opportunity Act. And because banks tend to regard underwriting policies — the standards by which they assess credit applications — as trade secrets, they’re generally tight-lipped about how you went wrong. Here’s how you can make sense of it all.
3 Factors That Make or Break an Application
When you submit a credit card application, the issuer is looking at three things:
1. Personal information and signs of fraud. The issuer makes sure you’re old enough to apply for a credit card, aren’t connected with terrorism or money-laundering activities and don’t have a fraud alert on your credit reports, among other things. If you’ve put a fraud alert on your reports — because someone was opening up lines of credit in your name, for example — the issuer will call you about the application in your name to verify that you’re really the one applying.
2. Credit. After covering the basics, the issuer typically pulls a credit score from FICO and calculates a separate score for you, based on internal underwriting standards and your credit profile. “They’re looking for a minimum score, typically, of 640 or higher,” says David Lin, a former director of risk management for consumer credit at Barclays and Citi, and whom NerdWallet is consulting on underwriting matters. Sometimes they’ll go down to 620, he says. If you have “public records” — that is, bankruptcies, civil judgments or public liens — or long delinquencies on your reports, your application will probably be rejected, regardless of your credit scores.
[See: 10 Simple Ways to Raise Your Credit Score.]
3. Ability to pay. A provision in the Credit Card Act of 2009 prevents issuers from opening credit card accounts for people whom they suspect can’t make the minimum payments. If your income is below the issuer’s minimum requirement, your application will be declined. If you’re approved for a card, you’ll get a credit limit that’s proportionate to your income.
Throughout that approval process, there are hundreds of reasons your application might be declined, Lin says. Here are a few of the most common ones — and what they mean in plain English.
[See: What to Do If You’ve Fallen (Way) Behind on Your Credit Card Payments.]
‘Excessive Obligations in Relation to Income’
Translation: Your debt-to-income ratio — your financial obligations, such as rent, car payments and other debts, as a percentage your gross income — is too high.
“For credit cards, the range of [debt-to-income ratio] cutoff could be usually 50 percent to 80 percent,” Lin says. It changes based on an applicant’s income and credit scores, he adds.
Solution: Make a debt payoff plan, and work on paying down your highest-interest accounts first.
‘Ratio of Balances to Credit Limits on Revolving Accounts Is Too High’
Translation: You’re getting too close to your credit card limits. Credit cards, which come with spending limits proportional to your income, are “revolving” accounts, and the percentage of available credit you’re using is called the credit utilization ratio. Underwriting standards vary, but it helps to keep your utilization under 60 to 70 percent on all cards, Lin says. FICO recommends keeping it even lower, below 30 percent on every card, for good credit.
Solution: Trim your spending and pay bills in full every month to keep balances low.
‘Income Below Minimum Requirements’
Translation: Issuers often set minimum income thresholds at $10,000 or $12,000 a year, Lin says. Generally, the income requirements for student cards are lower.
Solution: First, make sure that you’ve reported your income correctly. If you’re over 21, the Card Act allows you to report any income to which you have “reasonable expectation of access” — which might include income from a partner or spouse or support from parents, for example. For stay-at-home parents, including a partner’s income could be the difference between a credit card approval and rejection.
If your income still falls short and you can’t get a credit card, consider building credit in other ways. These include getting a secured credit card, becoming an authorized user on someone else’s account or applying for a credit-builder loan.
‘Limited Credit Experience’
Translation: This can mean either that your credit history is too short — generally, less than a year old, Lin says — or that you have only one account in your name. In some cases, you might not have a long enough credit history for a FICO score. You need at least one account reported to the credit bureaus for at least six months before a score can be generated.
Solution: Try applying for a secured credit card, store card, student card or a card from your bank, instead. These tend to be easier for credit newcomers to get, compared with rewards credit cards. Alternatively, ask a trusted family member or friend to add you as an authorized user or to co-sign for you.
‘Too Many Inquiries’
Translation: Whenever you apply for credit, the creditor pulls your reports, and it’s usually noted in your credit profiles as a hard inquiry. Issuers will typically only approve your application if you have fewer than six to eight hard inquiries in the previous six months, Lin says. Signs that you’re applying for too much credit can be a red flag for issuers.
Solution: Stop applying for cards for a while, or look for an issuer that’s more lenient about inquiries. And know that those hard inquiries will fall off your credit reports after two years.
‘Derogatory Public Record or Collection Filed’
Translation: A public record or a collection account is blocking an approval. You’ll most likely be denied because of these types of records, as well as long delinquencies, even if you have a high credit score.
Solution: Work on building positive credit history with the credit cards you already have. By the time the negative marks disappear from your credit reports in seven years — 10 years for Chapter 7 bankruptcies — your strong credit and clean reports will make it easier to qualify for better offers.
Toward a Better Process
Today’s credit card application process makes rejection confusing and upsetting, but it might be changing. Most major issuers have started “pre-qualifying” potential cardholders, or approving them for a card without making a hard inquiry. Lin believes these pre-qualification processes will become more popular and take much of the frustration out of the application process.
“In the past two or three years, banks have changed their policies to become more customer-centric. They want to have a good user experience,” Lin says. “I think they are getting there, but slowly.”
Until the process changes for the better, it’s up to us to understand our rejection letters and work toward a “yes.”
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Why Your Credit Card Application Was Rejected originally appeared on usnews.com
