Facebook Fan Q&A: My Credit Application Got Declined — How Long Should I Wait to Apply Again?

The following question came in via the Mint.com Facebook page. If you’ve got a credit-related question you want answered, ask away!

Question: “After being denied a credit card, how long should I wait before applying again?”

Answer: This is a very common question from people who’ve applied for credit, been denied, and aren’t clear as to the reasons.

The logical reaction is to try again and hope the lender reconsiders their initial decision. The problem with this strategy is it’s unlikely to work and can be damaging to your credit.

Lending has become almost entirely automated, so simply re-applying isn’t a good idea because of how lenders make their decisions.

Processing a credit application is done using a system called centralized lending. The decision of whether or not to grant you credit had been made long before you’d ever applied, in a state you’ve probably never visited, and by someone you’ll never meet.

And, if you applied at a national bank, you should know the decision is made out of one location, hence the term “centralized lending.”

What this all means is if you simply re-applied for credit and still don’t meet the lender’s minimum criteria, you’re just going to get denied again by the lender’s automated underwriting system.

There’s a better solution to address the issue.

When you were denied credit, the lender became obligated per Federal law to send you a declination letter. This letter, formally referred to as a “notice of adverse action,” must contain a variety of information.

The letter must include information about where the lender bought your credit report, the credit score they used to make their decision, and high-level reasons explaining their decision.

You were likely denied because your credit scores were too low. That means you’ll need to improve your scores to a point where the lender is more comfortable doing business with you.

So the answer to the question about how long to wait before applying for credit again is this — you’ll have to wait until your credit scores are better.

Now, all is not lost. There are over 10,000 lenders in this country and all of them are interested in new business. Point being, you can certainly apply somewhere else and take a chance that the new lender will have different lending criteria.

There’s a danger with this strategy, though. Every time you apply for credit, you’re giving a lender permission to access your credit reports. And every time they do so, a new credit inquiry will be posted to one of your credit reports.

Credit inquiries can lower your credit scores and while the impact is likely to be small, you need your scores to keep getting higher, not slightly lower.

The good news is there are many different credit card issuers targeting different types of borrowers. So, if you can’t qualify for one card, you’ll likely be able to qualify for another — if you’re willing to set your target and expectations differently.

If you applied with a large credit card issuer, then I suggest applying with a smaller bank. If you have a relationship with a credit union, then that’s another great alternative.

Credit unions often have more flexible lending criteria than large banks. The trade off is that you’ll likely get a much lower credit limit on a new credit card and a smaller network of branches and ATM machines.

Incidentally, the strategy of waiting until you’ve got better credit scores and finding different lenders is applicable even outside the credit card environment.

In fact, it might be more applicable in the auto and mortgage environments than in the credit card world.

Auto lenders have enormous flexibility because auto loans are secured. If you stop making your payments, the lender will simply come take back the car.

That allows lenders to make loans to higher risk borrower, albeit at higher interest rates with larger down payment requirements. The same is true for mortgage lenders.

Do you have a credit-related question for John Ulzheimer? Head over to the Mint.com Facebook page!

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.