It’s a common scenario: You apply for a personal loan or credit card and get denied. The reason seems shrouded in mystery, and you receive a letter with language such as “lack of recent installment loan information” or “proportion of balances to credit limits.” Find out what these reason codes actually mean and what to do about them below.
8 Common Reasons You Were Denied Credit
Too few accounts currently paid as agreed
Lack of recent installment loan information / insufficient installment loan information
Too many consumer finance company accounts
Recently opened bank revolving trades
Lack of real estate secured loan information
Lack of recent revolving account information
Derogatory public record or collection filed
Proportion of balances to credit limits
Adverse Action Notices and Credit Score Reason Codes
Under the Fair Credit Reporting Act, anyone who uses information from your credit report to deny you credit or services has to tell you in writing. The notice should say that you were denied in part based on information in your credit file and list the bureau that supplied the credit report. It should also provide some information about key factors in the decision, and those usually come in the form of “reason codes.”
There are a few reasons the law requires adverse action notices. First, it provides you with better information about why you were denied than a simple, “No.” Second, it lets you know you might want to review your credit report with a certain bureau, especially if there’s a chance the information could be inaccurate and you could challenge it.
8 Common Reason Codes and Positive Actions You Can Take in Response to Each
The reason codes listed on your adverse action notice might be difficult to decipher. Don’t worry, we’ve got you covered with some explanations below. There are a lot of reason codes, so we’ve picked some of the most common ones to cover here.
One thing to note is that these aren’t just reasons you might have been denied for credit. They’re also things that can negatively impact your credit score. Addressing them could help positively impact your score while making it potentially more likely you’ll get approved for credit in the future.
1. Too few accounts currently paid as agreed
This code can mean two different things:
You don’t have enough accounts for lenders or credit scoring models to effectively gauge your risk as a borrower. Even if you’ve paid your bills on time, if you only have one credit card that’s been open three months, that’s not enough information for many lenders.
You are late on one or more of your debts. If you’re not paying current debts on time, you might look like too much of a risk for many lenders.
What you can do: Start paying all your debts on time and do so for at least six months before applying for credit again. If you don’t have any debts being reported, consider signing up for ExtraCredit. You can use the Build It feature to get your rent and utility payments reported.
2. Lack of recent installment loan information/insufficient installment loan information
This code means you don’t have any installment loans in your credit history or you haven’t had one active in a while. Creditors like to see that you can handle a mix of revolving and installment loan accounts, and a good credit mix can actually help improve your score.
Consumer finance companies provide cash loans, often to consumers that are considered high risk by other lenders. Examples of these types of accounts can include certain personal loans, payday loans, and even some credit cards.
These loans can come with high interest rates and other unfavorable terms. But they are also sometimes a way for consumers with less-than-stellar credit to start showing they can make timely payments and build their credit. If you have too many of these loans, however, lenders start to wonder why you need to keep borrowing at subpar terms and may consider you too much of a risk.
What you can do: Work to pay off some of these accounts so you don’t have so many open. You might also talk to your bank or credit union about available loans that would be looked upon more favorably.
4. Recently opened bank revolving trades
Revolving trades refers to revolving credit accounts. These are accounts such as credit cards and lines of credit—they’re considered revolving because you can use them repeatedly. You can borrow, pay back, and borrow again as long as the account is open.
If you recently opened such an account, other lenders might be hesitant to lend to you right away. It remains to be seen whether you’ll run up those credit limits and get into debt, so lenders like to see revolving credit accounts responsibly managed for a while.
What you can do: Make payments on time and don’t run up your credit limits. Wait for the accounts to age a bit before applying for credit in the future.
5. Lack of real estate secured loan information
This means you don’t have a loan that’s secured by real estate—aka, a mortgage. This one typically doesn’t come up when you’re applying for a mortgage, but other lenders might see it as a barrier.
What you can do: This isn’t really one you want to solve just to get other credit. If you’re getting denied because you don’t have a mortgage, call the creditor and ask what else you can do to show that you’re a serious and responsible borrower.
6. Lack of recent revolving account information
This code means you don’t have any recent revolving account history. Again, this speaks to your credit mix, and many lenders like to see you managing multiple types of debt well.
What you can do: Ask a trusted friend or family member to add you as an authorized user to their credit card account. Just make sure it’s one that reports activity on the credit reports of authorized users and that you trust the account holder to make timely payments. You can also look for a secured credit card option for yourself if you’ve been denied for an unsecure credit card.
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7. Derogatory public record or collection filed
Collections accounts, bankruptcies, foreclosures, and repossessions are all examples of negative public records that could impact your score. They also give lenders a reason to believe you’re not a reliable borrower, so these derogatory marks—especially the more recent ones—can lead to denials.
What you can do: Review your credit reports to ensure all the information is actually accurate. Challenge negative information that may not be correct. If the items are correct, do your best to take care of collections and other issues on your report.
What you can do: Make an effort to pay down credit card and other revolving debt before you apply for credit again. And don’t run it up again, or you’ll be in the same boat.
Check Your Score to Better Your Chances
Adverse action notices containing reason codes such as “recently opened bank revolving trades” can be confusing. But when you know what these codes mean, you can take action and set yourself up for future approvals.
While you’re educating yourself, consider signing up for ExtraCredit, which shows you 28 of your FICO® scores—including the ones your potential creditors look at—as well as your credit reports from all three credit bureaus. Armed with that information, you’ll be in a better position to understand the steps you can take to improve your credit score and start feeling more confident when you apply for credit.
Get everything you need to master your credit today.