Why your credit card application was rejected

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A rejected credit card application stings – but maybe not as much as the letter you get afterwards, full of vague and unsatisfying reasons for the denial.

These letters, called “notices of adverse action”, are required by law to help consumers understand why their claim was denied. But they often raise more questions than they answer. You may be told that your income is below “minimum requirements” without knowing what those requirements are, for example. Or you might find that your financial obligations are “excessive” relative 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 “do not need to describe how or why a factor harmed an applicant”, according to the Federal Deposit Insurance interpretation. Corp. Equal Credit Opportunity Act. And because banks tend to think of underwriting policies – the standards by which they evaluate credit applications – as trade secrets, they’re usually secretive about how wrong you went. Here’s how you can make sense of it all.

3 factors that make or break a candidacy

When you submit a credit card application, the issuer looks at three things:

1. Personal Information and Signs of Fraud. The issuer makes sure that you are old enough to apply for a credit card, that you are not linked to terrorism or money laundering activity and that you do not 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 lines of credit in your name, for example – the issuer will call you about the request on your behalf to verify that you are the one. who makes the request.

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 640 or higher,” says David Lin, former director of consumer credit risk management at Barclays and Citi, and whom NerdWallet consults on underwriting matters. Sometimes they will go down to 620, he says. If you have “public records” – that is, bankruptcies, civil judgments, or public liens – or lengthy defaults on your reports, your application will likely be rejected, regardless of your credit rating. .

[See: 10 Simple Ways to Raise Your Credit Score.]

3. Ability to pay. A provision in the Credit Cards Act 2009 prevents issuers from opening credit card accounts for people they suspect may not be able to make minimum payments. If your income is less than the minimum required by the issuer, your request will be denied. If you are approved for a card, you will get a credit limit commensurate with your income.

Throughout this approval process, there are hundreds of reasons why your application may be denied, explains Lin. Here are some of the most common – 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 of your gross income – is too high.

“For credit cards, the range of [debt-to-income ratio] The threshold can typically be 50 to 80 percent, ”Lin says. This changes depending on the applicant’s income and credit scores, he adds.

Solution: Make a debt repayment plan and work on paying off your highest interest accounts first.

“The ratio of balances to credit limits on revolving accounts is too high”

Translation: You are getting too close to your credit card limits. Credit cards, which have spending limits commensurate with your income, are “revolving” accounts, and the percentage of available credit you use is called the credit utilization ratio. Subscription standards vary, but it helps keep your usage below 60-70% on all cards, Lin says. FICO recommends keeping it even lower, less than 30% on each card, for good credit.

Solution: Reduce your expenses and pay your bills in full each month to keep your balances low.

“Income below minimum requirements”

Translation: Issuers often set minimum income thresholds at $ 10,000 or $ 12,000 per year, Lin says. Generally, the income requirements for student cards are lower.

Solution: First of all, make sure that you have declared your income correctly. If you are over 21, the Cards Act allows you to report any income to which you have a “reasonable expectation of access” – which may include income from a partner or spouse or parental support. , for example. For stay-at-home parents, including a partner’s income could mean the difference between a credit card approval and rejection.

If your income is still insufficient and you cannot get a credit card, consider taking out credit through other means. These include getting a secured credit card, becoming an authorized user on someone else’s account, or applying for a home builder loan.

“Limited credit experience”

Translation: This can either mean that your credit history is too short – typically, less than a year, Lin says – or that you only have 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: Instead, try applying for a secure credit card, store card, student card, or card from your bank. These tend to be easier to obtain for newcomers to credit, compared to rewards credit cards. You can also ask a trusted family member or friend to add you as an authorized user or co-sign for you.

“Too many inquiries”

Translation: Every time you apply for credit, the creditor collects your reports, and this is usually noted in your credit profiles as a serious investigation. Issuers will typically only approve your request if you’ve received fewer than six to eight inquiries in the past six months, Lin says. Signs that you are asking for too much credit can be a red flag for issuers.

Solution: Stop asking for cards for a while or look for a more lenient issuer when it comes to inquiries. And know that those difficult inquiries will disappear from your credit reports after two years.

“Derogatory public file or deposited collection”

Translation: A public folder or a collection account is blocking a trust. You will most likely be turned down because of these types of records, as well as long late payments, even if you have a high credit rating.

Solution: Work on building a positive credit history with the credit cards you already own. By the time negative marks disappear from your credit reports in seven years – 10 years for Chapter 7 bankruptcies – your strong, clean credit reports will make it easier for you to qualify for better deals.

Towards a better process

Today’s credit card application process makes rejection confusing and upsetting, but it could change. Most of the major issuers have started to “prequalify” potential cardholders, or approve them for a card without doing a serious investigation. Lin believes these prequalification processes will become more popular and take much of the frustration out of the application process.

“Over the past two or three years, banks have changed their policies to become more customer-centric. They want to have a good user experience, ”says Lin. “I think they’re getting there, but slowly.”

Until the process changes for the better, it’s up to us to understand our rejection letters and work towards a “yes”.

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