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Turned Down For A Student Loan


One of our readers, Danielle, had this question about her credit cards and student loan:

I have a question – My credit score is 662. I have 5 Credit cards (revolving) and some installment accounts mainly student loans with 1 auto loan payment. I am trying to apply for another private student loan and was recently denied (even with a cosigner). My credit to debt ratio is rather high 96%, but I do not have any negative accounts, no late payments, and no defaults. If I was to pay off one or two of my credit cards, how long would it take for my credit score to increase?

Thanks for your question Danielle!

Paying down your credit card balance is exactly what you want to do in this situation. Your debt – to – credit ratio (how much you owe) is 30% of your FICO score. If you start paying down your current balances you should see your credit score start to rise within a month. (It takes at least a month for your credit card companies to report your new lowered balances to the credit bureaus. As your balances continue to go down, your score will continue to go up.

The standard financial advice for paying down your debt would be to pay down the credit cards with the highest interest rates first. However, if you want to maximize your credit score as quickly as possible, make sure you pay down your credit cards that are closest to the limit first, and do not focus as much on what the interest rate is.

Paying the cards down in order of “closest to the limit gets paid first” is the best way to boost your FICO score because it will have an immediate effect on your debt – to – credit ratio.

Ideally, for your score to go up as fast as possible, you will need to get all of your credit card balances down to under 30% of your available credit. If you can keep them that way, then over time, your credit score will be up over 700. All you have to do is just keep making your payments on time, and keep your balances low.

It may help for you to call your credit card companies – see if they can lower your interest rates, or even increase your limit. A limit increase would positively affect your debt to credit ratio too because that’s an instant way to make it look like you haven’t borrowed the full amount you have available.

Do be careful asking for too many limit increases in a row though. Each time you request a limit increase, the credit card company will pull your credit score, which counts an an inquiry. Too many inquiries will actually lower your credit score, and that’s what you’re trying to avoid.

In your position right now (with trying to get a student loan) I don’t think I would apply for any new credit cards for a while. Having new cards with no balances would certainly help to lower your debt to credit ratio, so it would seem to be a fix. But, new credit cards will also lower the average age of your accounts, and ding your credit score from the inquiries. So it’s probably best right now just to knock some of your total debt down, keep making your payments on time, and periodically check your credit score.

Before you apply for your student loan again, make sure that you give them a call. Ask them what credit score you need to have to be approved. That way you can monitor your own score and approach them again when you’ve reached that point.

It does surprise me that they wouldn’t give you a loan, even with a co-signer when you have no late payments or charge offs. That sort of suggests that they may think that your debt vs. your income is too high as well. Either way, paying down those balances is the first thing you want to tackle because it will raise your credit score fastest.

Thanks for your question!

We also had another reader, Nancy, who left us this question:

My husband and I are planning to file bankruptcy. My question is, we opened up a new account with Discover in hopes to transfer a higher balance over,however Discover only transfered half because of our credit. This account is so new we haven’t received a bill yet,should we transfer the Discover amount back to the original account, before we file?

Thanks for your question Nancy!

If I am understanding you correctly, you are about to declare bankruptcy and you are wondering what you should do with your new Discover account. The only reason you would want to transfer the Discover card amount back to the original card is if you are trying to keep the Discover account through your bankruptcy.

Credit card accounts with zero balances can sometimes slip by through a bankruptcy without being closed. If you are to have any chance of doing that, then yes, you need to transfer the balance back quickly, before Discover bills you. Once they bill you the account will show up as having a balance on your credit reports, and would probably be included in your bankruptcy.

If it’s too late, and they have already billed you, then you can go ahead and transfer the balance back, wait a month for the new billing cycle so that the card reports as zero balance, and then declare bankruptcy.

You can also consider doing what is known as reaffirming your debt, which basically means that you make an agreement with your credit card company to pay your balance with them – even though you are declaring bankruptcy. Not all lenders will accept debt reaffirmation, but if you want to keep the account, then it would be worth looking into.

Thanks for your question!

Do you have a question for us? Leave a comment below!

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November 20, 2008 @ 6:36 pm

Nice tip about paying down credit card debt on accounts closest to the maximum borrowable amount. Didn’t know this one.

November 20, 2008 @ 10:39 pm

You are providing great information .Many people seem to forget that by using a credit card they are not using “free” money. They still have to pay credit card off every month or get into debt.

Keep up this wonderful blog!

Devin Willis

November 21, 2008 @ 12:21 am

I work as a loan officer for a credit union. Regarding Danielle’s question – if she were applying for a loan where I work, her credit score means little next to her DTI. My institution focuses more on the debt to income ratio than we do credit scores (which also explains why we’ve never sold any of our mortgages to Freddie Mac/Fannie Mae). Credit scores merely set the benchmark, I.E. a credit score of 662 would qualify her IF her total DTI was no more than 43%.

Raising her credit score won’t do much unless it reflects zero balances on a good portion of those cards. They can see she’s responsible in terms of paying her bills, but what happens if she suddenly were to lose her source of income, even momentarily?

I think with the way the economy has been, we’ll see more of a reflection of this – people with great credit scores but too much debt to qualify. Within the last two weeks I’ve turned down people with 780+ scores (one even 800+) because their debt to income ratios were just too high.

January 17, 2009 @ 2:16 am

It’s always a help, to think about what Jesus said: “Look at the birds of the air: they neither sow nor reap nor gather into barns, and yet your heavenly Father feeds them. Are you not of more value than they?” 🙂

December 18, 2009 @ 2:08 am

I am trying to apply for a scholarship so was wondering if you have any idea on whether amount I receive in scholarships affect my eligibility for financial aid?

July 11, 2010 @ 8:35 am

How long (be as specific as possible, please!)after I stop making my credit card payments will the credit card companies be able to hurt me? (i.e., past the daily phone calls, hounding, threats, etc.) When will they actually take action that would result in severe consequences (like losing my house)? I’m getting ready to file bankruptcy, and have only recently stopped paying my bills. I need some time to get the funds together, though! How much time do I have???


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