How to Avoid Credit Denial
HOW TO AVOID CREDIT DENIAL
To avoid being denied credit, you need to find ways to improve your credit scores. Some tips to help you include the following.
Pay down your credit cards. Paying off your installment loans (mortgage, auto, student, etc.) can help your scores, but typically not as dramatically as paying down or paying off revolving accounts such as credit cards.
Lenders like to see a big gap between the amount of credit you’re using and your available credit limits. Getting your balances below 50% of the credit limit on each card can really help.
While most debt experts recommend paying off the highest-rate card first, a better strategy here is to pay down the cards that are closest to their limits.
Use your cards lightly. Racking up big balances can hurt your scores, regardless of whether you pay your bills in full each month.
What’s typically reported to the credit bureaus, and thus calculated into your scores, are the balances reported on your last statements.
You typically can increase your scores by limiting your charges to 30% or less of a card’s limit. If you’re having trouble keeping track, consider using a check register to track your spending, logging into your account frequently at the issuer’s Web site, or using personal finance software like Quick Books or Quicken, which can download your transactions and balances automatically.
Check your limits. Your scores might be artificially depressed if your lender is showing a lower limit than you’ve actually got. Most credit card issuers will quickly update this information if you ask.
If your issuer makes it a policy not to report consumers’ limits, however, as is the usual case with American Express cards, the bureaus typically use your highest balance as a basis for your credit limit.
If you consistently charge the same amount each month, say $2,000 to $2,500, it may look to the credit scoring software like you’re regularly maxing out that card.
You could go on a wild spending spree to raise the limit, but a better solution would simply be to pay your balance down or off before your statement period closes. Check your last statement to see which day of the month that typically is, then go to the issuer’s Web site about a week in advance of closing and pay off what you owe.
It won’t raise your reported limit, but it will widen the gap between that limit and your closing balance, which should boost your scores.
The older your credit history, the better your scores will be. But if you stop using your oldest cards, the issuers may stop updating those accounts at the credit bureaus. The accounts will still appear, but they won’t be given as much weight in the credit-scoring formula as your active accounts. That’s why we recommend that you that use your oldest cards every few months to charge a small amount and paying it off in full when the statement arrives.
If you’ve been a good customer, a lender might agree to simply erase that one late payment from your credit history. You usually have to make the request in writing, and your chances for a “goodwill adjustment” improve the better your record with the company. But it can’t hurt to ask.
A longer-term solution for more severe accounts is to ask that they be updated. If the account is still open, the lender might erase previous delinquencies if you make a series of 12 or more timely payments.
Dispute old negatives. Say that dispute with your dentist over an unfair bill a few years ago resulted in a collections account. You can continue protesting that the charge was unjust, or you can try disputing the account with the credit bureaus as “not mine.” The older and smaller a collection account, the more likely the collection agency won’t bother to verify it when the credit bureau investigates your dispute.
Some consumers also have had luck disputing old items with a lender that has merged with another company, which can leave lender records a real mess.
Dispute significant errors. Your credit scores are calculated based on the information in your credit reports, so certain errors there can really cost you. But not everything that’s reported in your files matters to your scores.
Here’s a list of negative items that’s worth correcting with the bureaus:
• Late payments, charge-offs, collections or other negative items that aren’t yours.
• Credit limits reported as lower than they actually are.
• Accounts listed as “settled,” “paid derogatory,” “paid charge-off” or anything other than “current” or “paid as agreed” if you paid on time and in full.
• Accounts that are still listed as unpaid that were included in a bankruptcy.
• Negative items older than seven years (10 years in the case of a bankruptcy) that should have automatically fallen off your reports.
You actually have to be careful with this last one, because sometimes scores actually go down when bad items fall off your reports.
Some of the negative items that you probably shouldn’t worry about includes:
• Various misspellings of your name.
• Outdated or incorrect address information.
• An old employer listed as current.
• Most inquiries.
If the misspelled name or incorrect address is because of identity theft or because your file has been mixed with someone else’s, that should be obvious when you look at your accounts. You’ll see delinquencies or accounts that aren’t yours and should report that immediately.
However, if it’s just a mistake by the credit bureau or one of the companies reporting to it, it’s usually not much to worry about.
Two more items you don’t need to correct:
• Accounts you closed listed as being open.
• Accounts you closed that don’t say “closed by consumer.”
Closing an account can’t help your scores, and may hurt them. If your goal is boosting your scores, leave these alone. Once an account has been closed, though, it doesn’t matter to the scoring formulas who did it, you or the lender. If you messed up the account, it will be obvious from the late payments and other derogatory information included in the file.
Other actions to beware when you’re trying to improve your scores:
• Asking a creditor to lower your credit limits. This will reduce that all-important gap between your balances and your available credit, which could hurt your scores. If a lender asks you to close an account or get a limit lowered as a condition for getting a loan, you might have to do it, but don’t do so without being asked.
• Making a late payment. The irony here is that a late or missed payment will hurt good scores more than bad ones, dropping 700 plus scores by 100 points or more. If you’ve already got a string of negative items on your credit reports, one more won’t have a big impact, but it’s still something you want to avoid if you’re trying to improve your scores.
• Consolidating your accounts. Applying for a new account can lower your scores. So, too, can transferring balances from a high-limit card to a lower-limit one or concentrating all or most of your credit-card balances onto a single card. In general, it’s better to have smaller balances on a few cards than a big balance on one.
• Applying for new credit if you already have plenty. On the other hand, applying for and getting an installment loan can help your scores if you don’t have any installment accounts or you’re trying to recover from a credit disaster like bankruptcy.
By the way, all these suggestions work best if you have poor or mediocre scores to begin with. Once you’ve hit the 700 mark, any tweaking you do will tend to have less of a positive impact.
And if your scores are in the “excellent” category, 760 or above, you’ll probably be able to eke out only a few extra points despite your best efforts. There’s really no point, anyway, since you’re already qualified for the best rates and terms.
A final recommendation to improve your chances of not being denied credit is to join a Credit Union.
Many are locally owned and often are more liberal to granting you credit than a traditional national bank.
To bank with a credit union, you must first have to qualify to be a member. Many credit unions qualify you as a member if you “live, work, or worship” in the town where they are located.
After becoming a member, you pay a “share” into the credit union, which is simply the money you agree to let them use while you’re a member.
So what exactly is a credit union? In the most overly basic sense, a credit union is an institution that is administered by its members for the purpose of pooling together money from these very members. And rather than making a profit, the credit union gives that money back to its members in the form of better interest rates. To put it simply, it’s a non-profit bank which means it has no shareholders, no profit making bank fees. And when was the last time you heard of a credit union in financial trouble?
One important thing to note is that with a credit union, your money isn’t insured by the FDIC. Instead, it is insured by the National Credit Union Association for up to $250,000. That’s the same amount covered by the FDIC.
