Your Credit Application Got Denied – Now What?

Whether you’re applying for a credit card, a mortgage, or a personal loan, your application may have been denied for a few different reasons. Maybe your credit score isn’t where you’d like it to be, or you don’t have an established history yet.  

The latter can be particularly frustrating since it becomes very difficult to build credit if no one will approve your application to start. Luckily, there are a few things you can do if you're new to using credit and need help building up your credit score for a new application. First, let’s look at what a credit score is and what goes into determining yours.

Understanding Credit Score

A good place to start is with understanding what goes into your credit score. Rocket Money^SM uses VantageScore®, a credit scoring model that takes into account six factors when determining your score. Here is a brief overview of the factors considered to make up your score:

Payment History

Payment history is the largest factor in your credit score, no matter what scoring model you’re using. This means it’s extra important to make any payments on time!

Usage

Otherwise known as your credit utilization ratio, this metric looks at how much of your overall monthly credit line you’ve used. Most lenders like to see usage under 30%; if you have $1000 in available credit a month and spend $500, your utilization ration is 50%.

Age And Type Of Credit

The longer you’ve been borrowing, the more a lender can look at to determine what kind of borrower you are. If you have a long history of on-time payments, a lender may offer you better terms on a new loan. This metric also looks at your credit mix. Having a mix of different types of accounts, like credit cards, mortgages, student loans and auto loans, shows that you can handle multiple types of credit and multiple payments.

Recent Credit Behavior

Whenever you apply for a new line of credit or a new loan, a note is made on your credit report. If you have too many inquiries in a short period of time on your report, you may appear to be financially overextended and less financially stable to a lender.

Total Balances And Debt

Paying down debts consistently helps to improve your score. This factor looks at your outstanding debt balances and your credit usage.

Available Credit

The amount of credit available to you has an impact on your score, too. It’s important to only open lines of credit and take out loans you need and you can reasonably repay.

Strategies To Build Your Credit Score

Now that you understand what goes into your credit score, here are some strategies to help you build your history and to improve your score.

Try A Secured Credit Card

A secured card is a credit card that requires a deposit upfront to fund the account, that the lender can use if you don’t make your payments. The cash is what makes the card “secured” – it’s different from an “unsecured” card or loan that doesn’t require any type of collateral (in this case, cash) to protect the lender from losing money if you don’t make payments on time. The table below outlines different types of secured vs. unsecured debts.  

Because the card is backed by your own money, there is less risk to the lender, and therefore they are more likely to extend you a line of credit. This enables you to start building your credit history.

Once you have the secured card, you’ll use it just like a credit card and make payments with funds, separate from the money you gave to the lender initially to establish a credit history. If you have an existing credit score but it isn’t where you’d like it to be, a secured card can also be helpful in repairing your credit history by proving your ability to make payments on time.

Unsecured Vs. Secured Debt

Just like there are secured and unsecured credit cards, there’s also secured and unsecured debt. Let’s go over some details.

Secured debt is something that requires an upfront investment from the borrower to serve as collateral for the lender. The idea is that secured loans are safer for lenders because if you default or fail to make timely payments on your debt, the lender can use the assets or funds used to secure the loan to make back their money.

Examples of secured loans include:

• Secured credit card: in this case, your “asset” is a cash deposit upfront
• Mortgage: your home is your collateral
• Secured business loan: your business and related assets serve as collateral
• Auto loan: your car is the collateral

Unsecured debt is basically the opposite – the lender does not require any collateral to secure the loan. Instead, lenders typically charge higher interest rates on these loans to mitigate some of the risk they assume with unsecured loans. Credit cards, personal loans, student loans and medical bills are all examples of unsecured debt.

Become An Authorized User

Another option to help establish or rebuild your credit history if you can’t get approved for a line of credit yourself, is to get yourself added as an authorized user to the account of someone you trust.

For example, if you know a family member who uses a credit card, it may be possible for them to add you as an authorized user to their account. This would give you access to your own card to begin spending and making payments on to build your history, while also having a safety net of another user who could make payments if you couldn’t.

It is very important the primary user adding you to their account has a strong credit history, otherwise you’ll link yourself to poor credit, having the opposite effect you want. Therefore, before making this decision, you might consider asking your friend or family member to check their credit score. Regardless of the scoring model, a score above 600 is usually considered fair, while a score above 660 – 670 is considered good, and above 780 – 800 excellent.

Your friend or family member can check their credit score for free using Rocket Money^SM.

Report Your Rent And Utilities

Through Rocket Money's partner Level Credit, you can get a leg up in establishing your credit by reporting things you already pay for like rent, water, gas, and/or your cellphone bill. While this information isn’t usually collected by the three major credit reporting agencies, Level Credit will have you link a bank account and do the reporting for you. This allows you to establish a credit history without worrying about making additional payments. Further, for a relatively low fee, Level Credit can even add up to 2 years' worth of previous payments helping you to build up your credit history ASAP.  

Consider A Store Card (As A Last Resort)

Because Rocket Money wants to help you save money, this isn’t our favorite option for establishing credit, but it is one option to consider if the others aren’t building up your history fast enough. Further, store-based credit cards, while generally easier to get approved for, also usually come with higher interest rates, making it even more important to stay on top of your payments. If you do decide to use a store card, all else equal (interest rates, fees, etc.), pick a store that you would generally go to for essentials anyway, so you’re not tempted to spend money on things you don’t need like clothes or entertainment.  

The Bottom Line

When managed correctly, credit can be an important and useful tool on your financial journey, whether that’s to buy something you need or finance a large purchase, like a home. Whichever option you choose, we hope this information is helpful in building or improving your credit, so you can get approved for the best possible offer moving forward.