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If you’ve been declined for a loan, don’t worry – you’re not alone. The average American household has an estimated $6,741 in carried credit card balances, so it’s no surprise that many of us need help with large expenses. Unfortunately, some loans get declined. If you’ve recently applied for a loan and didn’t get the answer you were hoping for, your best tool is education.

How do I know I’ve been denied?

Typically, you’ll receive notification of a denial within 30 days, in the same way that you applied for the loan. For example, if you applied face-to-face, that individual will call you, or if you applied online, you may receive an email. This denial notice is formally called an Adverse Action Notice. An Adverse Action Notice is sent for any credit-related application and is required to let you know the reason or reasons why you were denied. Inside the letter are the name and contact information of the credit bureau that provided the report, the credit report used in the decision, and your credit score, including two contributing factors. Since this is a free copy of your credit score, use this opportunity to review your score and inquire about any surprises.

Why was I denied?

Lenders look at two primary factors when assessing a potential borrower: the ability to repay and the willingness to repay. Ability to repay is determined by the applicant’s income and amount of existing debt, known as the debt to income ratio. Willingness to repay is determined by late or missed payments or a low credit score. Of the two, being denied for the former can be much more frustrating, because you’ve worked hard to be a “good borrower.” In this case, don’t be afraid to ask your lender questions about your denial. In some cases, the application may not have been filled in completely or accurately, and a conversation with the lender can occasionally lead to a positive outcome.

Other, less common, reasons for denial include insufficient collateral. For a secured loan, the lender may take possession of the collateral if you do not uphold the loan agreement. If the collateral does not value at the agreed amount, like a car with too many miles or a negative trade-in value, or a home that appraises too low, the lender will deny or counter-offer the loan.

If you’re just starting out and are new to credit, a lender may be unwilling to take the unknown risk. Experian Boost allows you to sign up for non-credit tradelines, like your rent or utility bills. This shows a lender that you’re willing and able to pay, and gets your credit a boost from untraditional, but helpful methods.

Does getting denied hurt my finances?

Fortunately, denials do not impact your credit score. Applying for credit may drop your score one or two points, but a denial does not cause additional change. Similarly, credit bureaus will usually recognize multiple inquiries of the same type and amount, such as rate shopping an auto loan, and will group the multiple inquiries together as one within a set timeframe.

What is the difference between a hard and soft pull?

A hard pull occurs when you apply for credit through a lender. You give permission, it shows as an inquiry on your credit report, and has a negligible impact on your credit score (as little as 0.5-1 point.)

A soft pull happens when a lender gets permission to review a large amount of credit from a purchased pool of candidates. If you fit the desired profile, you may receive mail or phone offers for credit cards and other loan products. While you do not provide permission, these pulls are performed legally and have no impact on your credit score. If you wish to stop getting these offers anyway, Equifax, Experian, Innovis, and TransUnion have created a website where you can opt out.

How can I practice good financial hygiene?

Keep in mind that everything you do involving credit contributes to your score to varying degrees. However, your credit score is largely comprised of loan payment history (35%) and responsible credit card usage (30%), two things many people do without second thought. However, you don’t need to use credit cards to build credit and carrying a balance can negatively affect your score. In fact, applying for a credit card initially lowers your score, but the intention is that it will rise with regular payments. Plus, if you pay before the credit bureau reports, it will be reported with no balance, so you should always pay in full each month and spend only what you can afford.

Filing bankruptcy is the #1 way to harm your credit. After all, a credit report outlines a person’s likelihood to file bankruptcy, and when you file, you’re proving its accuracy! Bankruptcy is easy to recover from financially, but it can take from 7-10 years for bankruptcy to be deleted from a credit report.

Watch out for payday lenders or other financial burdens. Keep in mind that if it looks too good to be true, it usually is. Always read your loan terms and be wary if a lender promises they can get the money to you within 24 hours. If you haven’t used the institution before, be careful. Credit tradelines contribute to 10% of your score, and financing centers are indicative of potential loss. Store cards are also perceived as more harmful than lender cards, even though their individual rewards may be tempting. Try to stay with reputable organizations like credit unions, who are member-focused, keep fair rates, and have a lending cap.

What happens now? Should I be concerned?

While getting denied for a loan is unfortunate, it’s not the end of the world. Some reasons for denial are circumstantial, but others are in your control. Comparable to the stages of grief, getting denied for a loan can cause a range of emotion.

Be sure to talk to the lender who denied you, as they may be able to provide a counter-offer or have credit counselors who can guide you through what to do next. There are secured products designed to help you reestablish credit, such as just after filing bankruptcy or haven’t paid bills on time.

Choose a primary financial institution and give them a reason to say yes. By choosing one organization for services like direct deposit and checking, you build a relationship with them that is backed up by history and data. You would most likely rather lend money to someone you know and trust, and for financial institutions, it isn’t much different! Applying for credit is similar to applying for a job (which can also include a credit check) and a candidate who has patterns of good decision-making is a good thing. Lenders want to help people but need to see initiative for a potential partnership.

How long should I wait before reapplying?

On average, it takes 3-6 months of good financial practice in order to see significant credit score improvement. If you don’t have any credit at all, it takes one tradeline with six payments to establish enough credit for a credit card. For something like an auto loan, spend some time saving for a larger down payment to cut back on the loan amount requested.

What tools exist to help my credit?

There are more products and services available today than ever before and many of them are readily available for you to do on your own. Credit Karma is a free monitoring app that notifies you of changes on your reports and makes suggestions about actions you can take to improve your credit. For a more personalized approach, Money Management International (MMI) is a non-profit organization and partner of American Heritage. MMI offers credit counseling services to help get you back on track and help get debt under control.

For those new to credit, including young adults, look for lenders who focus on helping people, and use other factors, like education or a first job. Consider if a cosigner or co-applicant is best for you and your needs. On the other hand, don’t forget to maintain your credit as you age, because unused credit can also lower score. You never know when you may want or need to borrow.

Can American Heritage help me?

American Heritage is committed to your success and personal financial journey. In addition to the resources above, we offer products and services designed to help you rebuild or improve your credit. If you would like to speak with one of our experienced lenders or our financial wellness experts, please contact us at 215.969.0777 x5010 and we will be happy to assist you.