The phrase “delinquent credit issues explanation” is typically a request by a lender either on an online form or a hard copy asking the applicant to provide details of their current credit issues, possibly including the recent past.
When a consumer applies for any type of credit, the lender must evaluate credit worthiness and ability to repay.
If a borrower is declined, they will receive an Adverse Action Notice with a reason explaining why the loan wasn’t approved.
If the reason is “delinquent credit past or present obligations”, the applicant may be declined without further request.
However, some lenders will request an explanation from the applicant in order to gain a clear picture of the situation that caused the derogatory credit.
The applicant would then provide an explanation for the delinquent credit issues before a final decision is made.
Ensure that you provide as much practicable information as possible that led to the delinquencies.
How do lenders determine the credit risk of a person?
When a consumer applies for any type of credit, the lender will review the applicant’s credit report and score.
The lender may also request income verification from a job or possibly tax returns if the borrower owns their own business.
By reviewing all of these items, the lender will determine if the applicant has the ability and intent to repay the debt once it is granted.
What is a delinquent credit issue?
“Delinquent credit issues” is a general statement that refers to any debts, in the past or currently, including any type of loan, credit card, or line of credit with late payments, long-term delinquency, or default.
It is stated broadly to cover a range of derogatory credit situations. When a loan is declined for this reason, there are usually additional reasons stated on the Adverse Action Notice.
Why is the lender asking for a “delinquent credit issues explanation”?
When a lender requests an explanation as to why the delinquent credit happened or is happening, it is often because the approving loan officer is on the fence.
It’s possible that they may consider the borrower as someone who went through a rough patch but pulled through, and overall credit history reflects more positive than negative.
Perhaps the approving loan officer is aware of extenuating circumstances, such as a divorce or displacement through natural disaster.
Situations such as these will negatively impact the applicant credit file, but are not necessarily within their control to mitigate.
Without an explanation, the consumer is considered entirely high risk and the loan will be denied.
When asked, it is always best to be honest and open regarding personal situations reflected on the credit report.
Providing an overview will be especially helpful to the person making the decision to approve or deny.
This is especially particular if the delinquencies were a direct result of unfortunate and unforeseen events such as a family tragedy, job lay off, etc.
In your explanation, it’s also important that you include the steps you intend to take in order to resolve your credit issues.
For example, you may have debt in collections, or delinquent payments from being unable to pay a loan, consumer finance accounts, or a car that has been charged-off as a loss in your credit report.
But if you have actively begun settling or resolving these issues, it will show the lender that you are making a conscious effort to become less of a credit risk.
How do you write an explanation for your delinquent credit issues?
The applicant may respond in writing or by speaking directly with the approving loan officer.
Otherwise, the request may have been provided on an online form during your process of application, in which case, there may be the option upload a document with your explanation.
It may also be possible to include as part of the upload any supporting documents that may help in your cause and also quicken the decision making process for the creditor.
Template for an explanation letter
Ensure you include the following in your letter:
- The date of writing
- Your details, such as your name, address and phone number
- A subject heading depicting what the letter will be about
- Provide explanations for each derogatory credit entry, addressing each one at a time. This will include reasons and justifiable evidence for delinquencies.
- Your details
Here is an example:
Date of writing
Your phone number
RE: Mark Jimenez’s Personal Loan application (application number)
To whom it may concern,
I am writing a letter in response to your request to provide an explanation for my delinquent credit issues.
Lender: Bank name
Explanation: This late payment was as a result of being laid off from my primary job. My second job was not earning me enough to make my monthly credit card payment. However, I did successfully find another job, after which I was able to back pay previous late payments including interest, as well as the next month’s repayment.
Debt in collections
Collection agency: Debt collector name
Explanation: My car was towed, sold and then the remaining debt was sent to collections. I was unable to pay the towing rates and impound fees immediately as I had been laid off during that time as well. The costs began to accumulate each day, so it meant that I had a larger amount owed. I have managed to land another well paying job, so much so that I have been able to come to a settlement agreement with the debt collector.
I am committed to continuing to improve my credit and understand completely the responsibility of servicing the personal loan of which I am applying. I have since never had a late or missed payment which hopefully shows my dedication in maintaining a healthier credit reputation. I will endeavor to pay on time and in full every month.
What to do if your loan application is rejected
If the application is denied after explanation is provided, the applicant may still have some recourse.
Ensure that it is in fact as a result of a delinquency, and not one associate with an incomplete application such as:
- The inability to verify the applicant’s identity
- Having insufficient number of credit references
- The inability to verify the applicant’s credit references
- Unacceptable credit references
A consumer may challenge a loan denial if they are able to provide verification that the information on the credit report is inaccurate or not their responsibility.
It is important to understand that the lender needs verification for anything out of the ordinary that would negatively impact the loan approval.
If your challenge is unsuccessful, it’s probably best to wait at least a couple of months before reapplying.
Too many applications can result in multiple hard inquiries on your credit report, and can impact it negatively since they can remain on your account for 2 years.
As a result, the lender will most likely perceive that perhaps you are struggling to secure new credit.
It further damages your credit report and ultimately does prevent you from securing any credit.
If, during the time from the first denial and the second application, you have been able to resolve your credit issues, the lender will most likely acknowledge this and no longer request for a credit issues explanation.
What are examples of “delinquent credit issues” on my credit report?
Delinquent Credit Issues is a general term used in reference to the following:
- Poor credit performance with us: The applicant has negative payment history and possibly default with this lender.
- Delinquent past or present credit obligations with others: The applicant has negative payment history and possibly default with other creditors.
- Collection action or judgment: The applicant has paid or unpaid collections on their credit report, or a judgment filed against them. A judgment is when you are sued in an effort to collect a debt.
- Garnishment or attachment: The applicant has an involuntary deduction (garnishment) filed against their earnings (for example, unpaid child support). Garnishment is when an applicant’s wages are being automatically reduced due to a government or court order to pay a debt. Attachment is when a lien has been placed on the applicant’s house or other property, such as a car, in an attempt to guarantee recovery of a debt when the assets are eventually sold (if the debt is paid, the lien will be removed).
- Foreclosure or repossession: This is when property of an applicant has been reclaimed by the creditor after long term non-payment of debt. The applicant either had a home foreclosed or a vehicle (e.g. car, boat, RV) repossessed.
- Bankruptcy: The applicant had a recent bankruptcy (typically within the past 2 years) that caused financial loss to creditors. Bankruptcy is considered the “cleanest” derogatory credit because it is a legal protection for debtors and authorized by court order.
How to avoid bad credit
Prevention is always less difficult than repair. Paying on time, keeping debt within affordable means, sourcing alternatives to borrowing can all contribute to healthy long term credit.
But life happens, and maintaining a credit score is not always the first priority when things go wrong or money is tight.
Eventually it will be time to journey the road back to healthy credit. When it happens, there are many resources available and ways to set things right.
In repairing credit, it may prove useful in knowing the credit bureau from which a particular financial institution will most likely pull your credit report, before applying for a loan.
Knowing this information will help guide you in determining which credit report to begin addressing first.
Financial institutions will typically have a preferred credit bureau and this will depend on the state in which you live and the loan for which you are applying.
The information below was compiled from creditboards.com, where consumers share the results of their loan applications regardless of whether they are successful or not.
|Creditor||Preferred credit bureau|
|American Express (AMEX)||Experian|
|Navy Federal (NFCU)||Equifax|
The link for each creditor will provide more information on the variations in preferences at the state level.
Will I always receive this request for an explanation when applying for loans?
With time and diligence, credit can recover. It may take several years, but it can happen.
When it does, the effort will be well worth it as lenders will most likely see you as lower risk when you decide to apply for a loan.
It is more likely in this scenario that an explanation for delinquent obligations would no longer be required.