Denied credit? Here's what you can do about it

"Why can't I get a credit card or loan?"

People are denied credit for various reasons — and it's not always because of something they've done. One of the most frustrating things can be trying to get credit so that you can build your credit history, but then you're denied because you don't have a credit history. It's like applying for a job and being told you aren't qualified because you have no experience.

Even if you were denied credit because of past mistakes, you can still act to change the course of your financial future. Here are some common reasons for declined credit applications — and what you can do about them:

Reason 1: You have a poor credit history

Negative marks on a credit report can be the gifts that keep on giving. Factors that contribute to dings on credit history may include missed payments of 30 days or more or bankruptcy, both of which can haunt you for at least seven years.

This is understandable. Would you loan money to someone, even a family member or friend, who had a less-than-stellar reputation for paying people back?

The good news is, as each year passes, the negative impact on your credit report lessens. This gives you the opportunity to move the needle in your favor with responsible, consistent repayment behavior.

Reason 2: You have too much debt

When lending companies review your application, they look at an important number called your debt-to-income, or DTI, ratio. In other words, they compare how much you owe each month to how much you earn.

If you already have too much debt, companies are reluctant to loan you money because they consider you a risk. So how can you ease their concerns? Try to keep your DTI ratio below 36%.

If debt is a problem, USAA has a three-step plan — Assess, Avoid, Attack — that puts you back in control of your financial destiny.

1. Assess your debt by reviewing copies of your credit report. Get a free copy of your credit report at annualcreditreport.com.^{See note1} It's possible for incorrect information to appear on a credit report. You'll want to dispute any inaccurate information as soon as possible. While you're in assess mode, also look at your current spending and create a realistic budget that helps limit overspending and going more into debt. If you need help getting started, you can download our budget worksheet or use the free USAA budget tool.

2. Avoid adding to your debt by tucking your credit cards away. Now's the time to contribute to your emergency fund: a savings account that's easy to access. Your goal is to save at least $1,000. You can find out why having an emergency fund is a high priority in our article, Should I save or pay off debt?

3. Attack your debt, starting with either the one with the highest interest rate or the one with the smallest balance. Learn which strategy is right for you in our article, How to get out of debt. Rather than have a negative mark on your credit history for a late or unpaid payment, at least make the minimum payments each month on all your debts. When you can, use one of the debt payoff strategies to eliminate your debt by adding additional money toward your debt payments each month.

Lenders want to see that you know how to be responsible with how much you borrow before they are willing to lend you more money.

Reason 3: You don't have a credit history

It's frustrating to be denied credit even though you haven't done anything wrong. But look at this as a great opportunity. You get to start with a clean slate, managing debt and spending wisely from the start.

To establish credit, consider these options:

• Ask a family member with good credit to add you as an authorized user on their credit card.
• Consider applying for a different type of credit card. (A word of caution: Beware of high annual percentage rates or APRs, and be sure to pay off your balance in full each month.)
• Consider applying for a loan.
• Begin paying off your student loans. Your payments will be reported and can help you establish credit worthiness. This applies even if there was no credit check when you initially took out the loans, which is often the case with federal student loans.
• Establish a relationship with a bank that issues credit. While savings and checking accounts don't show up on your credit report, they may play a factor in credit approvals.

Ensuring equal access to credit

The Equal Credit Opportunity Act of 1974 makes it unlawful for any creditor to discriminate against applicants based on race, color, religion, national origin, sex, marital status or age. It's also unlawful for creditors to base decisions on whether income is derived from a public assistance program.

If you're denied credit — or granted credit in a way that's different from the terms under which you originally applied — creditors must notify you of the specific reasons within 30 days. You also have the right to know why different terms were offered, such as getting a higher interest rate or other less favorable terms that you applied for. A good resource to learn more about this act and other protections is on the Federal Trade Commission's site.^{See note1}

If you have a poor credit history, it's easy to feel discouraged. But you can use this time to fix your financial ship, establish strong financial habits and build a good credit score.

Establish credit during economic hard times

During times of economic downtown, it can be harder to be approved for credit. Lenders are trying to limit risks by tightening their underwriting standards.

What might have been good enough to be approved before could become a decline. This can be frustrating. But focus on what you can control — minimizing your debt, paying on time, building savings and managing your spending.

The good news is there is help available to assist you in reviewing your credit situation and to provide credit advice. Consider speaking with a nonprofit credit counselor at the National Foundation for Credit Counseling.^{See note1}

Finally, remember that the story your credit report tells is often more important than the credit score itself. If you're declined for credit because of your credit report, focus on the information it contains. As long as you commit to making on-time payments, keeping your credit card balances low and only establishing new credit when necessary, your past mistakes won't haunt you forever.

The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.