The Fair Credit Reporting Act (FCRA) is a federal law that helps to ensure the accuracy, fairness and privacy of the information in consumer credit bureau files. The law regulates the way credit reporting agencies can collect, access, use and share the data they collect in your consumer reports.
When you apply for credit – whether it’s a credit card, auto loan, mortgage, or other type of credit – the lender will likely check your credit report and credit score to help them evaluate your creditworthiness. This raises a common question: can a credit bureau approve or deny a credit application?
The short answer is no, credit bureaus themselves do not approve or deny credit applications However, the information in your credit report plays a key role in a lender’s decision to approve or deny credit Here’s an overview of how the credit approval process works and the role credit bureaus play.
The Credit Application and Approval Process
When you apply for a new credit product like a credit card or loan, here are some key steps in the application and approval process:
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You submit a credit application This application asks for personal information like your name, address, Social Security number, income, and employment information
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The lender pulls your credit report. The lender will request a copy of your credit report from one or more of the three major credit bureaus – Equifax, Experian, and TransUnion. This report provides detailed information on your credit history.
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The lender reviews your credit report and calculates your credit score. Your credit report will be scoured for information like your payment history, amounts owed, credit history length, credit mix, and new credit inquiries. This information is used to calculate your credit score, which summarizes your creditworthiness with a three-digit number.
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The lender makes a credit decision. Using the information from your credit report and score, the lender will evaluate your credit risk and make a decision whether to approve or deny the application. Lenders have minimum credit score thresholds for approval.
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You receive a credit decision. If approved, you’ll receive a credit offer. If denied, you’ll receive an adverse action notice indicating you were denied and providing details on your rights.
So in this process, the credit bureau’s role is simply to provide your credit report information to potential lenders after you submit a credit application. The lender takes it from there, evaluates your creditworthiness, and makes the final credit decision.
Credit Bureau Role in the Credit Decision Process
While credit bureaus don’t actually approve or deny credit, the information in your credit report can heavily influence a lender’s decision. Here are some key ways credit bureaus impact the credit decision process:
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Compiling your credit history data. Credit bureaus maintain massive databases containing credit information collected from furnishers like banks and lenders. This data populates your credit report.
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Providing credit reports to lenders. Upon a lender’s request, credit bureaus will issue your credit report to the lender so they can evaluate your application.
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Developing credit scoring models. Credit bureaus developed the algorithms and mathematical models that calculate your numerical credit score from your report data. Different bureaus have different scoring models.
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Issuing credit scores. Along with your report, credit bureaus will provide the lender with your credit score. This summarizes your credit risk.
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Dispute processing. Credit bureaus are required to investigate any disputes you may submit if you believe your report contains inaccurate information. Disputes can impact your score.
So while credit bureaus don’t make approval decisions, they provide the reports and scores that heavily influence a lender’s decision-making. This underscores the importance of checking your credit reports routinely and maintaining healthy credit practices.
Factors Impacting Your Credit Score
Your credit score is based on information compiled in your credit report. Here are some of the most important factors that credit scoring models take into account:
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Payment history – Whether you pay accounts on time. The biggest factor, accounting for about 35% of a score.
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Credit utilization – The amount owed compared to total credit limits. Second biggest factor at around 30% importance.
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Credit history length – How long you’ve been using credit. Generally better to have a long history.
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New credit – Opening new accounts can lower scores in the short term.
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Credit mix – Having different types of credit (credit cards, loans, etc).
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Other factors – Inquiries, collection accounts, etc can lower scores.
Boosting your score comes down to healthy credit habits – making on-time payments, keeping balances low, having long credit history, and minimizing inquiries. Damaging factors like late payments and high balances can lower your score.
What to Do if Denied Credit
If you apply for new credit and get denied, don’t panic. Here are some tips:
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Check your credit reports for errors – if your reports contain mistakes, dispute them.
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If your score is low, focus on credit building activities. Make on-time payments, lower balances, and review your credit mix.
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If you have limited credit history, consider secured cards to build history.
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Allow time to pass after credit mistakes before reapplying.
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Talk to your lender and ask if there are steps you can take to improve your chances next time.
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Consider adding a cosigner with stronger credit for approval.
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Meet with a credit counselor to devise a credit improvement plan.
With time and a credit boosting strategy, your approval odds can improve substantially. Be patient, persist, and keep working on strengthening your credit.
The Takeaway
While credit bureaus don’t actually approve or deny credit applications, they play an instrumental role by compiling consumer credit data into credit reports and scores that lenders rely upon to make credit decisions. Maintaining healthy credit habits is key, since your creditworthiness information can make or break your approval odds. By routinely checking your credit reports, fixing errors, and taking steps to improve your scores, you can boost your chances of credit approval next time around.
How Does the FCRA Help Consumers?
The FCRA helps protect you by regulating how information in your consumer report can be used and accessed. Heres an overview of the key aspects of the law.
- The FCRA gives you the right to be told if information in your credit file is used against you to deny your application for credit, employment or insurance.
- The FCRA also gives you the right to request and access all the information a consumer reporting agency has about you (this is called “file disclosure”). You can get one free file disclosure every week from each national credit bureau by going to AnnualCreditReport.com.
- The FCRA gives you access to your credit report but restricts others access. In general, access is limited to people with a “permissible purpose,” such as landlords, creditors and insurance companies. If an employer wants to see your credit report, you must give written consent; employers must meet other requirements as well, and not all states allow employers to pull credit reports as part of an applicants background check.
- If you find what you believe to be inaccurate or incomplete information on your credit report, you have the right to dispute it. The credit bureau will then contact the data furnisher to confirm whether the information is correct. If its not, the credit bureau will either correct it or remove it within a certain time period. Accurate negative information, such as bankruptcies and late payments, will be removed after a certain time period.
- The FCRA gives you the option to opt out of the pre-screened offers of credit you receive.
- Finally, the FCRA gives you the ability to put a security freeze on your credit report, which ensures that potential lenders cannot check your credit report without you first lifting the freeze or providing the specific lender with a one-time PIN to access your credit report.
See a more detailed summary of the FCRA below or visit consumerfinance.gov/learnmore/ for more information. Keep in mind that in addition to the FCRA laws, some states have their own laws regulating consumer credit reporting; youll find that information below under “Notification of Rights.”
Para información en español, visite www.consumerfinance.gov/learnmore o escribe a la Consumer Financial Protection Bureau, 1700 G Street NW, Washington, DC 20552.
What Is the Purpose of the Fair Credit Reporting Act?
Passed in 1970, the FCRA helps consumers understand what actions they can take in regard to the information in their credit reports. Information is being gathered about consumers all the time: In addition to the three major consumer credit bureaus (Experian, TransUnion and Equifax), there are other organizations that may collect and use your information. For example, banks and credit unions may use information from your credit history to determine whether to approve you for a loan.
Why does it matter how information about your credit is used? Whenever you apply for a credit card, a car loan, a mortgage loan or any other form of credit, the issuing company checks your credit history to assess your creditworthiness. The terms you are offered for credit (such as a loan) may be based in part on your credit score and information in your credit report.
Your credit history affects more than just your ability to get loans or the annual percentage rate (APR) on your credit cards. For instance, prospective landlords could check your credit report to see how creditworthy you are when deciding whether they can trust you to pay your rent on time.
In some states, employers may check your credit report for hiring purposes. Also, depending on the state, insurance companies may check your credit to determine whether to offer you coverage.
Can TransUnion Deny Me Credit? – Consumer Laws For You
FAQ
Who decides to grant or deny your credit application?
The lender is the entity that evaluates your creditworthiness and makes the final decision to grant …
Can a credit card application be denied?
Credit card applications might be denied for a number of reasons. But the good news is that you have the right to find out why you were rejected for a credit card. Learn more about why you may get denied for a credit card and what you can do to improve your creditworthiness.
Can you legally be denied credit?
It’s illegal to give consumers indefinite and vague reasons for credit denial. Acceptable reasons for credit denial include: Your income was too low.
What will most likely cause a lender to deny credit?
- Credit report inaccuracies. Certain discrepancies on your credit report can lead to lenders denying credit. …
- Incomplete or incorrect loan application. …
- Job instability. …
- Not enough income. …
- Credit report indicates bankruptcy. …
- Debt income ratio too high. …
- Credit card utilization.
Will denied credit applications appear on my credit report?
No, denied credit applications won’t appear on your credit report. Lenders don’t report whether your applications were approved or denied because even approved applications don’t necessarily result in a new account. Generally, if you’re approved for a credit card, the card issuer will open the account automatically.
What happens if a credit card application is denied?
Credit card lenders must provide one within 30 days of receiving your completed application if they deny your application. The letter will explain why your application was denied. If you were denied because of your credit score, the letter will include your credit score and the credit bureau that supplied your information.
What happens if a line of credit application is denied?
Usually when someone is trying to get a line of credit, it’s for a big reason or major life milestone. Having a credit application denied can feel like a real setback. But this rejection isn’t something to take personally. It’s more common than people realize and doesn’t spell doom for your financial future.
How do I get a free credit report if I’m denied credit?
When you are denied credit, the lender is required by law to send you an adverse action letter explaining why. It must also provide instructions on how you can receive a free copy of the credit report it used to make its decision. If the lender used your Experian credit report, you can request a free report at Experian’s Report Access page.
Will a loan denial show up on my credit report?
While a loan denial won’t show up on your credit report, hard inquiries will. A hard inquiry occurs when you submit a credit application and give the lender permission to check your credit.
Who decides if a credit card is denied?
While the credit reporting agency provides your information, the lender ultimately makes the decision on whether to grant credit or not. If you need more information specifically about your denial, it’s usually best to contact the lender directly. Why was I denied credit?