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If you've flunked the credit scoring
test and been rejected by one institution, don't despair. There could be other
lenders with different criteria, and some may be willing to give you mortgage,
auto loan or even a secured credit card – for a price.
Why do some lenders say "no"
when others say "yes"? All lenders make a judgment about
character (your willingness to repay), capacity (your ability to pay) and collateral
(the value of what you are buying) when deciding to grant you a loan. There are
several tools that aid lenders in making this judgment, including automated credit
or risk scores. In some cases, these scores replace human decision making. As
a result, separate lenders can look at the same loan and view the same credit
risk differently. If your loan application met with "no"
at one lender, there may be another lender out there whose credit risk criteria
is different. If so, they may have a loan for you. - In the
case of a mortgage or auto loan, it may mean going into the sub-prime category.
Sub-prime lenders specialize in handling risky borrowers, and you'll pay for your
poor credit record with higher interest rates, higher upfront fees, or both.
- For credit cards, there also are issuers that handle poor credit
risks, with higher fees and rates. Or you can try a secured
credit card.
Your first step upon rejection is to
exercise an important right available to you under the Truth in Lending law: Find
out why you were rejected. - If you were rejected because
of information supplied by a credit bureau, get
a new copy of the report. Even if you did your homework and tried to get a
mistake or bad credit mark changed or removed, it doesn't mean the credit bureaucracy
didn't make a mistake. Remember: Under the Fair Credit Reporting Act, you may
not be charged for a copy of your credit report if you request it in writing within
30 days after being rejected for a loan. Find out which bureau supplied the report
used to reject you, and get your free copy. If there's a mistake, go back through
the procedures for settling a dispute.
- If you're
applying for a mortgage, ask your lender for a copy of your Residential Mortgage
Credit Report, which is more detailed than a regular credit report. Credit bureaus
issue these reports, too, which cover your credit for the past seven years.
If
there is no error, and you simply can't qualify for credit, consider joining a
credit union. Often credit unions are more lenient toward members they already
know. Mortgages
Several lenders specialize in handling borrowers with less-than-prefect
credit.
Auto loans
For many car buyers, the dealer often can find a lower interest rate, or arrange
financing for buyers with special problems. Car dealers have
become middlemen, receiving some profit from arranging car loans. The dealer may
shop a potential buyer's loan application with as many as 30 different lenders.
To get the dealer's business, a bank may offer special rates or take on a risky
borrower who the bank normally would reject. Unless the car buyer has perfect
or near-perfect credit, the dealer is in a better position than the buyer to negotiate
an auto loan, because the bank wants the dealer's car loan business.
But just because your credit isn't spotless, don't
let the dealer take you for a ride on financing. You still should
shop around and make sure you don't end up buying unnecessary extras,
such as extended warranties or overpriced credit life insurance.
Myvesta,
an Internet-based nonprofit debt counseling agency in Gaithersburg,
Md., describes how car dealers may up the ante for those with a
tainted credit history in a guide: "How to Buy a Car With Marks
on Your Credit and Not Get Taken for A Ride."
Credit
cards
Several credit card issuers carry customers with poor credit
histories, and charge higher rates and fees for the privilege. You probably don't
have to look far to find a credit card issuer willing to take you on – start
with your mailbox. Consumer advocates have been complaining for years that card
companies send out "pre-approved" card applications to many people who
shouldn't be taking on new debt. Another option is a secured
credit card. With a secured card, you secure your credit card by depositing money,
generally equal to the amount of your credit line, in a savings account or CD.
However, your card issuer maintains a lien on the deposit account, which you stand
to lose if you fail to make timely credit card payments. In
considering a secured card, try to avoid steep application and annual fees and
unusually high card rates as high as 21 percent. The range in a recent survey
varied from an average 9.72 percent to 20.05 percent and annual fees ranged from
$18 to $45.
Also, make certain you are getting a fair savings
account rate for the amount of time you plan to be tying up your
money. It's important to find out when your card issuer plans to
re-examine your account to determine whether you qualify for an
unsecured credit line. It should not be longer than 18 months after
you apply. More banks than ever are offering secured credit cards,
so it pays to shop around.
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