NEW YORK (MainStreet) Figuring out the myriad reasons why lenders deny credit card applications can be complicated, but consumers can boost their likelihood of approval.
The process to approve consumers for credit cards varies among lenders, each having its own criteria that people must pass.
"Consumers should do their research in advance and only apply for the cards that are likely to grant the credit they seek," said Gail Cunningham, spokesperson for the National Foundation for Credit Counseling. "Credit card companies want to extend credit, but only to people who represent a low risk for default as defined by their business model."
Consumers can easily improve their credit and position themselves to increase the likelihood of credit being extended.
Some people, especially Millenials who are working at their first job, simply lack having enough existing credit. Lenders prefer being able to review a track record of how a person has managed credit in the past, she said. A thin or nonexistent credit file can give a conservative lender reason to deny.
This can be easily remedied by building credit judiciously such as starting with a secured credit card, but consumers should confirm in advance that the issuer reports activity to the credit bureaus, she said. Another option is to consider becoming an authorized user on another person's card as the activity of the primary cardholder as well as the authorized user is reported to the bureaus.
For renters who have little or no credit or are simply looking to build their credit profile, they can opt-in to have their rent payments reported, said Jeff Golding, CEO of WilliamPaid, a Chicago-based company which allows people to build credit through paying their rent online for free.
A few companies such as WilliamPaid allow people to report their rental payments to one or two of the credit bureaus.
"It's typically a renter's largest monthly obligation, and it must be done every month, so take advantage of adding a positive trade-line to your credit report," he said. "The addition of positive rental payment data in Experian credit reports can be a tremendous benefit to anyone who rents, especially non-credit-active, cash-based consumers. We have helped a lot of people go from not having enough credit history to generate a score to being approved for a mortgage."
Another reason credit card applications are denied is when your pay history is poor, said Cunningham. The highest weighted element in the scoring model is how a person repays his or her debt obligations. A history of skipped or late payments can be a knock-out punch when attempting to obtain new credit.
Start by identifying any issues by obtaining a credit report for free at www.AnnualCreditReport.com. The next step is to start making payments on all accounts, even those that are past due, which builds a positive history.
If you have been neglecting your existing credit cards by charging all your purchases on them and only making the minimum payments, your credit lines are maxed out.
"Creditors don't like to see that a person is utilizing all of their available credit, as this can signal that they are living on credit and opening a new line will only increase current indebtedness," she said.
Start by paying down your credit card debt so the total amount is equal to no more than 30% of available credit since credit utilization is the second highest weighted element of the scoring model.
If you recently bought a car or obtained a mortgage, your overall debt is likely to be too high. A person's debt-to-income ratio is a reflection of how much is owed relative to their income. The easiest solution is to start paying down your debt or get a part-time job.
Applying for too many cards at the same time is a red flag to lenders. Consumers should only apply for the number of cards that are necessary, Cunningham said. Avoid applying for more cards when you get denied. Instead, wait a few months to reapply so your credit report is updated.
Unpaid tax liens and Chapter 7 bankruptcy can remain on a credit file for up to ten years. Other negative activity such as a foreclosure, late and missed payments, collection accounts and Chapter 13 bankruptcy can remain for seven years.
"A person doesn't need to wait until the activity rotates off the credit report, but putting distance between the harmful information and applying for new credit is helpful," she said.
While most lenders do not advertise that they require a minimum income, most will not approve credit unless you reach their threshold. Start by researching which cards are more likely to grant credit to people with low incomes.
People who change jobs frequently or are sometimes unemployed can indicate an unstable income, which makes them appear risky for not paying or defaulting to the lender. Make steady employment a priority, Cunningham said.
"When applying for credit, ask yourself if you would loan money to you," she said. "If the answer is 'no,' then it's likely the financial institution won't either. That's the signal that it's time to take action and improve your credit profile. Credit card companies want to extend credit, but only to people who represent a low risk for default as defined by their business model."
--Written by Ellen Chang for MainStreet