What to Do When Your Credit Card Application is Denied: Part 1

This article is part 1 of a two-part series. For more on this, read:

What to Do When Your Credit Card Application is Denied: Part 2

You recently applied for a credit card that you really want. And now, in your hands, is a letter from the credit card issuer.

You tear open the envelope with anticipation! You’re already planning to get a flat-screen HDTV with your fabulous new and impressive-looking rewards card.

As you read the letter, you quickly get a sick feeling in your gut. You can’t believe it, but your application for the credit card of your dreams has been denied.

This is the credit card version of the “Dear John” letter. And as with relationships, this news is especially painful if you didn’t see it coming.

But when it comes to credit cards, there’s an additional type of angst going on here. This bank—which doesn’t even know you—has passed judgment on your creditworthiness. It feels almost like strangers are questioning your character. It’s a lousy feeling, for sure.

The letter, known in the credit world as an “adverse action notice,” is your roadmap to future success. So resist the urge to crush the letter into a ball and drop kick it into the trash (although I do understand the sentiment).

Now, sit down with a cup of coffee or tea (or something a whole lot stronger, if necessary) and read every word of the letter carefully.

What the letter will tell you

Thanks to a new rule that’s part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, if you’re denied for a credit card, the lender must provide you with a copy of the credit score that was used to make the decision about your application. You’ll also get “up to four key factors” that explain why your score isn’t higher.

For instance, one of the reasons might be a late payment. Or maybe you have a high balance-to-available credit ratio. Whatever the reasons are, give yourself a minute to digest the news.

Now, the lender doesn’t have to say which credit score it used, but you’ll be given the range of the score that was used. So it’s easy to figure out which credit score was used because the scoring ranges differ. FICO scores range from 300-850; VantageScores range from 501-990. Most lenders use FICO scores when making credit decisions.

The letter will also tell you which credit reporting bureau it used to obtain your credit history information. You’ll have 60 days to get a free credit report from the bureau that was used.

You’re already entitled to a free annual credit report from each of the three major credit reporting bureaus: Equifax, Experian and TransUnion. I usually recommend getting a copy of your credit report every four months from each bureau. But if the reasons you’re given for the denial don’t make sense to you, then get all three reports so you can see what’s being reported by each bureau. Review each one carefully and make sure there aren’t any errors on your reports.

Don’t apply for another card today (or tomorrow)

Okay, take a deep breath. Then take about 19 more. It’s unpleasant to see your credit transgressions outlined in a letter. It’s easy to panic and feel the need to prove that you can, indeed, get approved for a credit card.

Resist this urge. Do not apply for the credit card offers you received in the mail today. And don’t go looking for the offer that came in yesterday’s mail. Before you set your sights on a new card, you need to do some research and calmly evaluate your situation.

Just to put your mind at ease, I want you to know that being denied for a credit card will not show up on your credit report. It will show that the card issuer in question checked your credit report (called an “inquiry”) and that’s all.

But if you start frantically applying for a number of cards, each inquiry will show up on your credit report. This will make you look like you’re desperate for credit. Trust me, it’s not a good look!

Know your credit range

Once you know your FICO score, you can determine what “classification range” your FICO score falls within. Here’s a general guideline:

Excellent: 750+
Good: 700-749
Fair: 650-699
Poor: 600-649
Bad: Below 599

There’s also a “no credit/limited credit” category. This includes those who are either young or who have limited experience having a credit card account in their own name. This category also includes individuals who are new to this country and need to build a credit history here in the U.S.

In Part 2 of “What to Do When Your Credit Card Application is Denied,” I’ll show you how to search for a credit card that falls within your credit range. So the next time you apply for a card, your chances of success will be much higher. Yes, I know it won’t be your first choice, but I’ll also give you tips on how to use your next card to move up the credit ladder. As your score and credit history improve, you’ll get closer to qualifying for your dream card.

Image: Petar Neychev | Dreamstime

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