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Thin Is Out!

http://www.fool.com/personal-finance/credit/2005/08/16/thin-is-out.aspx

Dayana Yochim
August 16, 2005

Dayana - Help, I applied for an American Express Blue Card and was denied! These are the reasons they gave:

  • Account(s) not paid as agreed.
  • Derogatory public record or collection filed.
  • High utilization of credit lines or insufficient utilization information.
  • Too few established accounts or insufficient account information.

Well, maybe. But I didn't think I had anything outstanding. And high utilization of credit lines? I have only one credit line -- a Mastercard -- and I pay it off every month! My credit was OK last time I checked. Now I'm totally freaked out.

What do I need to do to sort this out? -- Dissed in Dallas

Dear Miss Dissed,

The sting of rejection. The cold shoulder of denial. Blacklisted. Rebuffed. Dismissed. Dissed. No matter what you call it, getting told by a lender that you're not worthy hurts.

Thankfully, lenders let you know you're not their type via email or letter, so there's no need to slink to the other side of the bar to lick your wounds. You also aren't left wondering exactly where you fall short: Creditors are required to give you a reason (or three) for turning down your application.

The most common grounds for denial, according to MyFico.com (the consumer site of credit-reporting giant Fair Isaac (NYSE: FIC  ) , are:

  • Serious delinquency.
  • Serious delinquency, and public record or collection filed.
  • Derogatory public record or collection filed.
  • Time since delinquency is too recent or unknown.
  • Level of delinquency on accounts.
  • Number of accounts with delinquency.
  • Amount owed on accounts.
  • Proportion of balances to credit limits on revolving accounts is too high.
  • Length of time accounts have been established.
  • Too many accounts with balances.
  • And finally, the most dreaded: I think of you as a brother/sister/third cousin twice removed.

So you don't measure up . it could have been a lot worse, right?

I know that's little consolation for the financial slap in the face, but I've got good news, too: You get a lovely parting gift for your trouble -- a free credit report! That's right. When you are denied credit (or insurance coverage, or a job) based on information in your credit report, you are legally entitled to a free peek at your file. My advice: Grab it.

Victoria's secret
While there may be some ugly surprises in your file, my hunch is that American Express (NYSE: AXP  ) turned you down because you have what's called a "thin" credit file. (Yes, there is such a thing as "too thin.") That means there isn't a long history of credit use upon which to judge you.

Twiggy looked great in couture, but gentlemen preferred Marilyn. Same goes for lenders. They favor borrowers who have a bit of meat in their credit files. When there's not a lot in your file, what's there gets amplified. It's kind of like a minimalist home -- each piece of furniture and every speck of dirt is spotlighted because there's not a lot of distracting bric-a-brac.

Gorging on credit isn't the right fix for a thin file (although having at least a few lines of credit helps to establish your borrowing history). Time is the antidote. The more of it that passes (over the span of which you'll exhibit goody-two-shoes credit ways, right?), the beefier your borrowing power. Score one for "fat and mature!"

Despite the sting of being rejected by AmEx, the company did give you a starting point for your credit investigation. When you get your credit report, look for the blemishes that were pointed out.

  • Account(s) not paid as agreed.
  • Derogatory public record or collection filed.
  • High utilization of credit lines or insufficient utilization information.
  • Too few established accounts or insufficient account information.

Account(s) not paid as agreed. Obviously someone has reported a late payment. Your credit report will reveal who.

Derogatory public record or collection filed. You mentioned in a subsequent note that you did get a collection notice a while ago, which you paid immediately. Make sure your report shows that you did indeed pay the debt ultimately. Sometimes you can negotiate to have the collection item reported more favorable with full payment.

High utilization of credit lines or insufficient utilizationinformation. If you have only one card -- and it's your first -- chances are it has a low credit limit that's easy to "max out," even if you pay off the balance in full every month. This knock is simply a timing issue. Your lenders report your credit activity to the credit reporting bureaus on a regular basis. But it's not real-time -- it's just a snapshot of one time in your billing cycle, which unfortunately was a period where you apparently had a lot of charges on your card.

"Insufficient utilization information" is a ding that can happen to even the most established card carriers. Simply having credit is not always enough. You have to actually use your cards once in a while, or else the lender has no activity (good or bad) to report. (It's important to note that you don't have to carry a balance month-to-month to establish credit or improve your score.) A dormant account -- although still reported as "open" in your file -- doesn't say much about how you handle credit.

Too few established accounts or insufficient account information. This is just another spin on what I said above. Because you are relatively new to the credit game, you don't have a well-established track record. Your accounts haven't been open long enough to satisfy the lender's requirements.

Get an ego boost
What can you do? Don't freak out. There's no line item on the credit report that gives you bonus points for hysteria. When it comes to rejection by a lender, the best payback is to prove them wrong.

According to statistics, anywhere from 30% to 80% of credit reports contain blunders. The gaffes can be anything from errors of omission (not reporting a current line of credit) to out-of-date information (saying you still live at an old address) to outright inaccuracies (claim