A friend recently was turned down for a store credit card at her favorite department store chain. I was puzzled by this rejection, because she seemed to me to be a perfect candidate for credit: she has no debt, a steady income, pays her bills on time, never carries a balance on her bank credit card, has a nice bank balance, and uses cash for most purchases. In fact, she really didn't need the store credit card but wanted it for the special promotions and discounts only offered to credit-card customers.
As we looked into why this department store chain didn't want her as a credit customer, we learned that her conservative approach to finances actually may have worked against her. Here's how.
She doesn't have much credit, other than a single bank credit card. While it might seem that having little debt would be viewed as a good thing by the department store, it has a downside. Having very little credit and, therefore, not much of a credit history (especially a recent credit history) could have negatively affected her credit score, and a consumer's credit score is one of the main factors considered when deciding whether to issue a new credit card.
Little Available Credit
The agencies that determine credit scores don't just consider how much credit a consumer has, but how much of it is available. Say a consumer has very little credit (perhaps one credit card with a very low credit limit, such as $500) and typically charges close to the credit limit each month (such as $400 per month). This pattern may hurt her credit score, since, from the credit reporting agency's standpoint, she is using 80% of her credit, leaving only 20% as available credit. Based on our research, it appears that the credit reporting agencies prefer that average credit used totals not more than about 30% of the total available.
My friend requested and was rejected for the department store credit card and then, two months later, was encouraged by a clerk at the same store to try again. The second credit card application may have been doomed from the start, since the same factors that caused the initial rejection probably were still in place and, in addition, her credit request two month earlier may have caused a reduction in her credit score, making her second request even less likely to succeed.
Hard to Get the Facts
My friend found that it was difficult to get her credit score although, based on information from the Consumer Financial Protection Bureau ( www.consumerfinance.gov/askcfpb), if she had asked, the department store may have been required to provide her some information on why she was rejected for a credit card and on her credit score. Otherwise, although she is entitled to a free credit report from each of the credit reporting agencies each year, she might have had to pay to see her actual credit score.
Based on what we learned, we concluded that consumers need to understand how credit issuers make their decisions and the factors that go into calculating a credit score. Otherwise, even the most financially responsible consumer may find it difficult to obtain credit.
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- credit score
- credit reporting agency
- bank credit card