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Help! I have Been Declined for a Personal Loan!

Clarissa enjoyed a wonderful holiday at the coast with her cousins after graduation. She used her credit cards to pay for most of her food, hotel, and entertainment and they quickly became maxed out. She had gone to her father to get some money to pay her rent and buy some clothes for work. When she confessed to him that her credit cards were maxed out and her credit was soon going to be suspect, he went ballistic and ordered her to get a loan to pay off the unsecured debt. He even offered to cosign a loan.

Clarissa is a stubborn young lady and attempted to get a loan on her own. She was immediately declined due to a low credit score. Although lenders each have their own criteria for determining the credit-worthiness of prospective borrowers, they make their evaluation based upon the information provided in the person's credit file. For Clarissa, her recent holiday spending spree made her seem a poor credit risk. And when they obtained information from her, they deemed her an even greater credit risk.  
I told Clarissa she needed to find out the specific reasons she was denied credit. I helped her obtain a copy of her credit report. There were additional overdue accounts and defaults that Clarissa had not considered. "Honestly, I forgot about those," she confessed to me. As much as it embarrassed Clarissa, I asked her to review all of the data in the report for its accuracy. We were able to find an outdated report on a bill from a doctor's office that Clarissa had indeed paid. 
"I just didn't feel like myself over holiday," Clarissa told me. "It is like I was defrauded by my alter ego!" Fraud is no laughing matter, I gently told her. It is most people's worst nightmare to have their identity stolen by someone obtaining credit fraudulently. She agreed that her simply "not feeling like herself" was of no consequence to the lender. She stilled owed the money and needed more.

Been a little bad lately?

Clarissa's recent late and non-payments were the most damaging. Why? Recent late payments, within the past six months or one year, are particularly injurious to a person's credit record. Even if a person has had just one payment more than thirty days late in the past year their chances of having credit extended to them are greatly diminished. Late payments on bankcard accounts are usually the most damaging, since banks are such a significant reference.
As I advised Clarissa, it is so important to get at least the minimum payment posted on time each month. On Clarissa's credit report it would have made no difference whether her monthly payments were the minimum or large sums, it was just important that she make a payment on time each month. Even on-time minimum payments would have kept her rating in good shape. As always, there is an exception to the rule. Since Clarissa had recently run her credit card debt up, she would have been considered a poor credit risk for that reason alone. The situation with her credit was further exacerbated by her failure to make payments to some of her lenders.

No credit history?

Jenson, the baker who makes my favorite pastries, came to Australia with his life savings and a dream to bake. He was financially self-sufficient and purchased the building in which he lived upstairs and baked downstairs. He didn't need to take out a loan until recently. His breads and cakes had become so popular that he wanted to purchase a restaurant space across the street from his bakery and open up an eating establishment. He didn't have that kind of available capital. Even though he had no recognized debt, he had not established credit in Australia either. Many people with no credit history find credit nearly unattainable. Credit scoring systems are not intended to evaluate a first-time credit user, but rather a person who has some sort of credit and spending history. Even bankcard issuers usually  like to view (at the minimum) a year's worth of prompt payments on other cards and or accounts as a precursor to extending the offer of a card.
I told Jensen he may want to smart small. The smartest choice to create a positive credit history would likely be though a Visa or MasterCard.  Allow me to explain. Jensen was able to get a mortgage on the new building based on his ownership of his bakery business. For someone just starting out without Jensen's means, there are credit cards offered through bankcard issuers who allow customers to put up small amounts as collateral in return for a card with a small credit limit. As he uses his card, his bill paying behaviour is recorded and sent through to the credit bureaus and he begins to build a good credit history.
Mortgage advantage
Many mortgage companies opt for reporting all mortgages to credit bureaus. This procedure is a plus for homeowners, since a mortgage can be a sign of financial stability to a lender. On the flip side, if you don't pay your mortgage payment, the credit bureaus will know. Credit bureaus are now being informed of most mortgages that are 90 days or more delinquent.

Can you handle it?
Cameron always paid all of his credit cards on time. It was a careful dance of borrowing one to repay the other. Over time, however, Cameron's interest rates increased and it became more and more difficult to pay the monthly minimums. Because creditors want to see that you are able to handle credit over a period of time, credit references on your credit report help prove this ability. Carrying too many credit cards, even four or more bankcards, put Cameron at risk for being turned down for "too many bankcards."Cameron was able to maintain his credit limit until I was able to help him with a debt reconsolidation loan at a lower fixed rate. But even if he wanted another unsecured credit card, he would not qualify under the conditions of most banks. 

A past relationship?
In fact, Cameron decided to go with a company with which he already had a borrowing relationship. Having had a previous loan with the lender improved his chances of getting a debt reconsolidation loan there.
Cameron obtained an installment credit line with the company he chose for his debt reduction loan. Revolving credit is often viewed as a better reference than an installment credit reference due to the scrutiny under which revolving credit applications are under. With revolving credit a borrower is approved to borrow up to a certain limit, and they can then draw upon all or part of that credit line whenever they choose. Installment credit lines are fixed and the borrower pays back the amount on a fixed schedule. 

Sometimes, you just can't win
To the Camerons, Jensens, and Clarissas of Australia, understand that sometimes even repayment won't help you secure a loan in the future if you have really let your loans get the better of you. A credit provider can disapprove an application for credit even if overdue or oustanding accounts, court judgments or your credit report shows that they have been paid out entirely or the matter has been resolved. That's why I say that an ounce of prevention is worth a pound of cure.

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