They can determine whether or not you are granted a loan, mortgage or credit card. It’s a good idea to get to know your credit rating and what, exactly, is on your credit report. It can be frustrating when you always pay your bills on time without missing payments, yet still get declined for a line of credit. What is it that lenders look for when considering you for a loan? While there are no hard and fast standards that determine whether a lender will accept you, there are some things that can significantly raise or lower your odds of getting that line of credit you applied for.
Let us first look at FICO scoring. FICO scores are calculated by looking at various different parts of your credit information that is found in your credit report. There is both positive and negative data recorded in your report and different aspects will either raise or lower your credit score.
Your data is separated into 5 categories:
- Payment history, which account for about 35%
- Any outstanding debt, which accounts for 30%
- Length of your credit history, accounting for 15%
- Types of credit you have, accounting for 10%
- New credit accounts, accounting for 10%
- FICO scores run from 300 to 850, with a higher score showing that you are a lower risk and a lower score making you a higher risk.
Your Payment History
This is one of the most important factors that a potential lender will look at when determining if they will grant you credit. A lender wants to be assured that they are going to be paid back, making your track record for making your payments on-time an important factor. If you have an erratic history of making payments, a lender will more than likely not consider you for a loan. But this can also depend on other factors, such as how long ago those erratic and missed payments happened and what your payment history is like in the present.
Factors like missed or late payments, defaults on mortgages, or bankruptcy will all be considered a red flag for potential lenders. This also includes any accounts in default that have been passed to a collection agency. A few mishaps on your credit report, if other areas are up to par, won’t entirely block you from being approved for credit. However, it can limit the amount that a lender will grant you and your interest rate can be higher as a result.
Your Outstanding Debt
The second major piece of data that a lender will look at is your present outstanding debt. Lenders want to be sure that the amount of credit you are applying for is something that you are able to pay back. If you have a large amount of debt outstanding it can be a red flag for lenders that you may have trouble paying back any additional debts granted. So, the lower your outstanding debt, the better your chances for getting credit.
Credit History Length
The length of your credit history accounts for 15% of your credit score. If your track record for making payments on-time and being a responsible borrower is a good one, it tells lenders that you can cover your obligations, making it more likely that they will grant you a loan. Another factor that plays a role in this category is how often you make use of your credit cards. Having them and hardly using them gives lenders nothing to work with when deciding if you are a good or bad borrower. Using them too often and always have a balance of 50% of more can also make things look bad for you.
Any New Accounts
Lenders like to see a credit history that is established. Every time you apply for, or open, a new credit account it goes on your credit history. A red flag for lenders is seeing a report where a borrower has opened a lot of new credit accounts in a short period of time. It brings into question, to the lender, why you would suddenly need to have so much credit. It also brings into question your ability to be able to pay these back on time, especially if they see that you have maxed out all of the limits on your cards. If you are trying to establish a new credit record or clean up an existing one, it’s best to limit the amount of credit cards you apply for.
Types of Credit Accounts
It isn’t just the amount of debt you have, but the types of debt that are looked at by lenders. Credit comes in many forms; credit cards, student loans, auto loans, mortgages, personal loans, and store credit accounts. Lenders do like to see some variety on your credit report because it tells them that the borrower has experience with a variety of credit resources and uses them responsibly.
Other Factors Considered
These are just the main areas that are taken into account by lenders when you apply for credit. Lenders may also have their own set of guidelines and scoring methods that they will use. An example would be a major company that has several individual store chains, such as Shoppers Direct who runs Very, K&Co, Littlewoods and ISME. They may look at whether or not you have opened a credit account in any of their other chains before considering how much credit to allow you.
Other People’s Debt
Other factors that are considered when applying for credit are your income, how long you have been working at a company, whether you own or rent a home and how long you have lived there, and how much you currently have sitting in your bank account.
If you have ever been a co-signer for another borrower, that also goes on your credit report and will be considered as part of your outstanding debt. This also means that, should that person default on payments, it will also reflect negatively on your credit report and you could end up paying off another person’s whopping debt. Co-signing a loan is something you want to be very careful about.
Making Minimum Payments
It’s no secret that carrying a balance on your credit account makes money for the creditor. However, lenders looking at your credit history tend to not like seeing months of minimum payments on your history. This tends to give the impression that you are stressed financially and are struggling to make payments, possibly even coming close to defaulting. While it’s okay to pay the minimum amount every now and again, consistently doing so can be a red flag that you aren’t able to make the full payment of your balance.
Short Sales of a Home
Short sales are also a factor than many believe won’t affect their credit report. However, they do have an impact. The account is basically settled for an amount that is less that what a borrower has agreed to pay. It is listed on your report as being “settled” and can have the same negative effect on your credit report as having a foreclosure. The difference between the promised amount and what was actually paid is what gets reported on your credit history as a balance being owed.
Many Credit Report Hits
Did you know that every time you apply for credit it generates a “hit”, or hard query, on your credit report? If a lender sees a lot of queries in a short period of time, it could raise a red flag. It may not be so bad for someone with a fairly good credit rating, however for those with bad, marginal or borderline scores it can make one look credit unworthy.
A tip here, if you are looking to apply for car, student or home loan, is to apply to all of your options in under a 45 day period. It will minimize the negative effect on your credit history because, when reported, similar inquiries will be lumped together and looked at as one inquiry, rather than 4 or 5. However, this doesn’t apply to credit card applications.
Taking the offered cash advance on a credit card can be tempting but can be looked at negatively, making a lender think you are either desperate for funds or that you may have lost your job. Let’s face it, not many people will take a cash advance so that it can just sit there in a bank account untouched. Also, the interest rates on a cash advance are much higher than the interest rates for charges on the same card. Many people don’t realize how much taking that cash advance can damage their credit report.
A cash advance is added to your owed debt immediately, which will lower the amount of credit available to you, as well as cause a dip in your credit score. Cash advances are also considered a risky move. Many of the larger credit card issuers re-evaluate their customer’s history on a regular basis. They do this to see if a customer is eligible for a raise in their credit limit, or if they are considered a risk, in which case they could close your account or cut your credit limit down. This can affect your overall credit score that other lenders will see.
It’s a good practice to regularly check your credit report to see what is on it. This way, if there are errors or things affecting your rating, you can proactively do something to change it. Cleaning up a bad credit report can take some time and one mistake that many people make is applying for credit again and again, thinking this will make them look more creditworthy. Unfortunately, it can have the opposite effect in many cases. For those building their credit history for the first time, take care with what you sign up for and how often.
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