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If You Have Bad Credit, a Letter of Explanation Could Help

Written by
Alex Huntsberger
Alex Huntsberger is a personal finance writer who covered online lending, credit scores, and employment for OppU. His work has been cited by, Business Insider, and The Motley Fool.
Read time: 5 min
Updated on November 9, 2023
older man using his laptop and learning that if you have bad credit, a letter of explanation could help
A letter of explanation could be the difference between getting your loan application approved and having it denied.

This might be surprising to hear, but certain important financial decisions can hinge on something as simple as a letter. Letters of explanation are an important part of the lending industry; they allow borrowers to clarify certain items in their financial history, including a bad credit score.

Lousy credit can leave you high and dry when it comes to borrowing money during a fiscal emergency. While there may be bad credit loan options out there, they won't help if you're looking to rent or buy a home. And that's where one of these letters of explanation could come in handy (if you're considering a bad credit loan for anything other than a home, check out the OppU Guide to Bad Credit Loans here).

What is a letter of explanation?

Letters of explanation are submitted as a part of a loan application process to explain certain aspects of your finances that might otherwise raise a red flag.

Letters of explanation are mostly associated with mortgages, because those loans have an incredibly stringent application process. Talk to anyone in the middle of applying for a mortgage or has just finished applying for one and the half-deranged look in their eyes will tell you all you need to know.

These letters are necessary because sometimes there is more to a particular situation than meets the eye. Sometimes perfectly normal transactions can look suspicious if, for instance, they were done in cash; other times a recent change of job or address may require clarification for underwriters.

Basically, lenders just want to confirm that you will be able to afford your loan. Letters of explanation help them establish an accurate picture of your finances as they assess your application and decide whether or not to approve you for a loan.

It’s not just lenders either. Remember that many landlords will check your credit when you are trying to rent from them, so a bad credit score could end up costing you that sweet apartment. Writing a letter of explanation to a prospective landlord or rental company may help your chances of being accepted.

Not all bad credit scores are created equal.

If you have a bad credit score—which is generally considered to be any score under 630— it’s probably because you have made mistakes managing your credit. You have likely been missing payments, getting accounts sent to collections, or maxing out your credit cards—or some combination of all three!

In cases like these, with a repeated pattern of mismanagement, a letter of explanation probably isn’t going to do you any good. Your credit score is an accurate reflection of you credit use. A traditional lender like a bank or a mortgage company is right to worry. You will have to turn your behavior around and build up your credit score before you can qualify for a regular loan.

However, if there are extenuating circumstances that have led to your score dropping, a letter of explanation might help. Did you end up in the hospital and your medical bills forced you to declare bankruptcy? Or what about a personal loan that you actually paid off but was sent to collections in error? Maybe you moved cities or states for a better paying job but you had to put your moving expenses on your credit card.

There are tons of different scenarios where a one-time situation caused your score to drop. And these are the kinds of scenarios where a letter of explanation could lay out the situation and—this part is very important—make clear why said situation should not affect your finances moving forward.

One position where a letter of explanation is a great idea is to combat errors on your credit report. If you are having trouble getting errors resolved, you should send a letter to explain the mix-up. After all, it’s not your fault that this information is lowering your score. To learn more about fixing credit report inaccuracies, check out our blog post on whether a quick credit boost is possible.

5 tips for writing a bad credit letter of explanation.

Now you know that a letter of explanation can be a useful tool for overcoming a lousy credit score. Here are five pieces of advice to follow when composing a letter of explanation for poor credit:

Be formal: This is a business communication, not an email to your mom or a text to your bestie. Date your letter and make sure you sign it at the bottom. Also, avoid casual language as much as possible.

Be specific: Think of your letter as answering a very specific question about your finances; include relevant dates, dollar amounts, and your loan application number if you have one. If you have documentation, include it. If you don’t, say that you don’t.

Be classy: In general, avoid blaming other people and companies for what happened to you. Even if it wasn’t your fault, stick to the “X happened” instead of “X did this to me, that stupid jerk.” Take responsibility for the situation and promise to be better in the future.

Be brief: Your letter should only contain information that is absolutely relevant to the matter at hand. With a bad credit score, your letter might be a little longer than a letter concerning a single transaction; regardless, make your letter as short as possible while still being effective.

Be honest: This is crucial. Do not lie, exaggerate, or twist the facts. That will come back to bite you big time. Make sure you cop to the role you played in the events. The more you come across as a straightforward, trustworthy person, the better.

A letter of explanation isn’t a magic wand you can wave over a denied loan or rental application and magically get it approved. But it is certainly a useful tool for any person looking to borrow money or rent a home. There are so many parts of the great financial machine that are hopelessly complicated. Letters of explanation, on other hand, are just wonderfully simple.

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