Our guide to the best mortgage lenders (opens in new tab) will help you find ideal finance for a new home.
While many American’s won’t struggle, it pays to know how to get credit. Getting accepted for credit is by no means certain, and if you’re refused when you most need a loan or advance, it can be very troubling. Most financial services will look at your credit before helping you out.
Before you apply for any kind of credit, read these tips to increase the chances of being accepted. If you are applying for credit - whether that’s a loan, credit card or mortgage – the last thing you want is to be rejected outright. Fortunately, there are several steps you can take to increase the chances of your application being approved.
1. Check your credit score
Firstly, it’s a good idea to familiarise yourself with your credit score. This three-digit number is important because lenders will check it before agreeing to give you credit. The higher your score, the more likely you are to be accepted for credit and the more likely you are to be approved for the top deals. We’ve got a guide to the best credit support services (opens in new tab) available right now.
There are numerous credit scoring models, and credit scores can range depending on the model used as well as the credit reference bureau that pulls the score. FICO is the most common scoring model and your score is calculated based on your payment history, number of credit inquiries, credit mix, credit utilization and credit account history. VantageScore is another popular scoring model and was introduced by the three credit reporting bureaus, Equifax, Experian and TransUnion, in 2006.
Both FICO and VantageScore 3.0 use a score range of 300 to 850. The average FICO score in the US is 703, according to Experian data from 2019, whilst anything above 800 is considered exceptional.
Many credit card issuers allow you to check your credit score for free when you log into your account online or check your monthly statement. There are also a number of credit websites that offer free credit scores, like Credit Sesame (opens in new tab), but read the terms carefully before signing up.
2. Correct errors on your credit report
As well as checking your score, it is also important to get hold of a copy of your credit report from the three major credit reporting agencies (Equifax, Experian and TransUnion). You can get access to a copy for free once per year from each of the agencies. Take a look at AnnualCreditReport.com (opens in new tab) for more information.
Having access to your credit report will allow you to check whether there are any errors, such as incorrect personal details or inaccurately reported late payments. Inaccuracies on your report can result in a lower credit score, so if you spot any, it’s important to get them fixed right away. You can do this by writing a letter to the credit reporting agency or agencies to dispute the information in your file, including copies of any documents that support your dispute. The agencies then have 30 to 45 days to investigate your claim and correct the errors.
3 Take steps to improve your credit score
Once you have checked your credit score and report, it is worth assessing whether there are any other measures you can take to help improve your credit score.
A good place to start is by paying your bills on time. Missed and late payments can lower your score so it’s worth setting up automatic payments on your accounts to ensure you remember. Make sure you pay at least the minimum payment by the due date, but if you can, pay more than this each month as you will clear your debt more cheaply and more quickly.
Spacing out credit applications - ideally by six months - can also benefit your credit score. Applying too frequently can be viewed as a sign of financial distress and lenders may have concerns about your ability to repay the debt.
If you rent your home, you could also consider using services such as Rental Kharma and RentTrack to ensure your rental payments are reported to the credit reference bureaus (you can’t report this yourself). Providing you meet your rental payments on time each month, using a rent-reporting service can help to increase your credit score and demonstrate your reliability to landlords and banks.
4. Understand your debt-to-income ratio
When deciding whether to give you credit, lenders will also factor in your debt-to-income ratio. This shows how much debt you have compared to how much you are earning, and it can lower or improve your credit score.
In general, the lower your debt-to-income ratio, the easier it is to manage your finances. A high debt-to-income ratio, on the other hand, can be a sign you are experiencing financial difficulties and that you may not be able to cope with further repayments.
As we mentioned in our article: What is debt-to-income ratio? (opens in new tab), if you are looking for a mortgage, around 36% is said to be the best ratio, while for home loans it’s around 43% and for debt consolidation, it’s between 36 and 49%.
To calculate your debt-to-income ratio, divide your combined monthly debt payments by your take-home income and the answer will be your percentage figure. If you are concerned your debt-to-income ratio is high, try to pay more into your credit card or loan each month. If you have multiple debts, a debt consolidation company (opens in new tab) can help you to combine your debts into one monthly repayment.
5. Consider a credit repair service
If you’re short on time, it could be worth paying a credit repair service to do the hard work for you and give your credit score a boost. Credit repair services are companies that help to give you the right tools to get your credit back on track and will also remove negative information from your credit report.
Credit repair service representatives are usually attorneys and FICO specialists with years of experience, so they can help find the best way for you to achieve a better credit score. In turn this will help you to get accepted for more competitive loan and credit card rates.
The amount you will have to pay a credit repair company will depend on the plan and service you are buying. For the basics you could be looking at $50 to $100, with an additional set up fee of $20 to $179. You can find out more in our article: Best credit repair services (opens in new tab).
6. Learn why you were rejected
If you apply for credit and are rejected, by law, lenders are required to give you a reason. You should be sent a rejection letter that explains why you were turned down. Examples include having a poor credit history or a high debt-to-income ratio, but it could also be due to an error on your application or a mistake on your credit report.
Don’t throw the letter away. No matter how demoralising rejection can be it is worth reading the letter carefully to see what steps you can take to help ensure you don’t get rejected again. You can also request a free copy of your credit report every time you are rejected for credit.