It can be devastating to have your loan application denied, but it’s not uncommon. While it may be difficult to accept and adjust in the moment, getting turned down for a loan is a situation where you’re able to make lemonade from lemons – if you know what to do next.
Why were you denied credit?
When you apply to any financial institution for a loan, line of credit, or credit card, you have handed over the details of your personal finance history via your credit report. The lender uses the information provided to evaluate your creditworthiness, and if that history is lackluster, you won’t receive a loan or account approval. The reason they decided to pass on the opportunity to lend money to you will be provided. You should receive a letter, also known as an adverse action notice, explaining the major reasons why your application was denied.
This letter of denial can now become part of your action plan.
What can you do now?
The lender had the benefit of reviewing all your information when they made their decision. Gather together all that same information to begin working on your new plan. Pull your credit report from the three major credit reporting agencies and find your credit score online. Thoroughly review all three reports and check them for errors. If there is a mistake listed, you can take steps yourself to make the corrections on your credit reports. Each agency is different, but typically you can deal with it online and find a resolution in just 30 days.
Examples of Mistakes on a Credit Report
Information that is not yours. Credit reporting agencies may confuse names, addresses, social security numbers, or employers. If you’ve got a very common name this is possible.
Problems because of identity theft. If you have been the victim of identity theft, mixed account information may appear on your credit report.
Information from an ex-spouse. If you have been divorced, your prior spouse’s information may be mixed with yours.
Outdated information. Accounts may still be listed after the legal deadline for removing them from your reports.
Incorrect payment status. The payment status of accounts may be incorrect. E.g., there is a late payment listed, but you paid the account on time.
More than one delinquent date on an account. Even if an account has been transferred to a debt collector, your report may show the old date – or even a duplicate entry.
Wrong notations for closed accounts. Accounts you closed may look as if the creditor closed them rather than you having had closed the account, which can reflect poorly on you.
Fully paid accounts are still listed as delinquent. Credit reporting agencies often fail to note accounts in which delinquencies have been remedied.
After reviewing your report and correcting any errors, you can begin the process of building up or repairing your credit.
Cleaning up Credit Accounts
Play catch up. Look over your monthly bills and see what back balances you owe. Do your best to bring all your accounts up to date. If you’re unable to make a big payment to clear up your delinquent balance, call your creditor – they might be able to work out a payment plan for you.
Stick to the plan. Moving forward, pay all your bills on time and in full – all of them. Utility companies and housing payments are typically reported to the credit agencies if they are late, so it’s important to be consistent. Setting up automatic payments from your checking account is an excellent way to avoid missing payments.
Make arrangements. Gather your bills together, total it all up, and create a plan. Find the room in your budget to pay extra towards your debts until they are at a zero balance. If you’re not sure where to start, try listing your debts from smallest to largest, then pay them off using the Snowball Method, and working your way down the list. Tackling a small debt will get you motivated to take on the rest.
Establish new accounts. Once you’ve gotten into the habit of shrinking down debt and making on-time payments, it’s time to add a new account into the mix. A small loan or responsibly used store credit account will go a long way in raising your credit score.
Keep it up. Slow and steady wins the race here, it can take quite a while to rebuild your credit. By getting yourself into the habit of paying your obligations off in full each month, you’ll set yourself up for success in the future.
Also, it would be a good idea to ask the lender or lenders that denied you what type of credit you would need to get approved with them in the near future, and what tips they might have specific to your needs.
