Getting approved for a loan is easy--if you don't mind overpaying fees and interest rates. The challenge is to apply for a loan that someone with your credit just barely qualifies for. That way, you'll get the cheapest loan possible, since the lender will group you with other borrowers who are as trustworthy as you or moreso, rather than lumping you with less trustworthy borrowers.
The secret is to make sure the lender realizes your credit history is as good as it really is--even if it isn't great. It's like applying for a job. You wouldn't show up for an interview in your pajamas, as if you just got out of bed on Sunday morning. Instead, you'd comb your hair and put on your best suit. Here's how to spruce up your credit report so it looks its best. The more time you have, the better the results will be.
First, order a free copy of your credit report, if you don't have a recent one. If you've been turned down for a loan, the lender should have sent instructions on how to get a free copy, or you can get one free copy a year from each credit agency by going to annualcreditreport.com. Don't sign up for anything you need to pay for (unless you want to), and don't worry about getting your credit score. It's the details on your report that you're interested in. According to the Free File Disclosure Rule, each credit agency is required to give you a copy of your report once a year if you ask for it, based on the Fair and Accurate Credit Transactions Act.
What most people don't know is that there are other credit agencies besides the big three who participate at annualcreditreport, and you can also request a free report from them. If you've borrowed from payday lenders or other loans for people with bad credit, or dealt with rent-to-own companies or bought furniture or electronics on installment plans, you may also want to check your reports with the companies that keep those records. One of the main credit reporting agencies in that area is Teletrack and here's how to order a report from them.
When you can see the report, don't overlook checking the obvious stuff. They have your name, social security number and address correct, don't they? Check the personal details to make sure they're correct and up to date.
Then look to make sure all the individual items on the report are correct. If you've paid a loan off, does the report reflect that? Does it show any missed payments, past due loans, or other adverse things, that aren't true? If something happened more than seven years ago, is it still on the report (or ten years ago, if it's a bankruptcy)? Older items should drop off the report, so you don't need to live with them forever.
Dispute any Mistakes
If you notice any mistakes, dispute them. The website of the credit reporting agency will offer instructions on how to do it. By law, the company has to investigate with the lender who provided the information and get back to you within 30 days. The FTC offers a sample dispute letter here.
If your credit report is accurate, or if you have any mistakes cleared it up, it's time to improve your report, so it looks as good as possible to the lender who will approve your loan. This is the hard part, and the one that takes the most time. If you're wanting to be approved for a significant loan, like a mortgage, it's well worth it.
Lenders don't like to see your credit maxed out. They're more comfortable if other lenders are willing to let you borrow more. Pay down credit cards to get your credit usage as low as possible compared to your credit limits.
Old accounts are valuable. If you want to close any credit cards, choose the ones that you've had the least amount of time. It may be helpful to pay off and close more recent accounts, if you think your credit limits may be high compared to your income, but in general, having more credit available than you need is a good thing and shows you manage debt responsibly.
When you're getting ready to apply for a loan you really want, avoid applying for small loans or anything that requires a credit inquiry, since a lot of inquiries in a short period of time can lower your credit score for a while. Sometimes, banks and insurance companies will check your credit report if you're just opening an account or getting a quote. If you're not sure, ask if the company does a "hard pull" on your credit report. A "soft pull," like companies do before they send you pre-approved credit offers, won't affect your credit score.
If you want to improve your credit score over the long term, don't shy away from the responsible use of debt. Having a long credit history with a variety of different loans, paid off or paid on time, will actually increase your credit score.
Don't Accept a "No" Immediately
When you apply for a loan, the lender will generally first look at a your credit report and base their initial decision on that. But all is not lost if you're turned down. If you're close to qualifying, you may be able to talk to the lender directly and explain certain circumstances. A unique experience that isn't likely to be repeated, such as unexpected bills due to a medical emergency, a long lay-off before you got your current steady job, or a divorce and bankruptcy tied to another spouse years ago, will look less bad on a credit report if it's explained to a sympathetic lender. If your circumstances have changed, making your credit report no longer apply to your current situation, you may want to apply for a loan with a local bank or particularly a credit union, where you can talk to a credit manager face-to-face. Even if your application is turned down by a lender without a local office, sometimes you can accomplish the same thing with a phone call.
If you're applying for a credit card, and have another card with the same bank, you can request that the other card be closed or some of the credit line be switched to the new card, and often be successful at being approved.
Ask for a Reason
If you're not approved for a loan, the Equal Credit Opportunity Act actually requires the lender to tell you a specific reason, if you ask in the next 60 days after being turned down. The reason may be already included in the response you received, but if not, write to the address on the response and request it. Some examples of reasons might be "Income insufficient for amount of credit requested," "Number of recent inquiries on credit bureau report," or "Temporary or irregular employment." As you can see, this information is useful, since it tells you what you need to do to improve your credit-worthiness to get accepted.