September 30, 2019
Your credit score is one of the most important factors that lenders review when deciding whether to extend credit to you – but it’s not the only factor. It’s possible to get a loan with a poor credit score and be denied a loan with a good credit score based on other considerations.
Your credit score is distilled from five main factors in your credit report – on-time payments, credit utilization (your credit in use relative to your limits), length of credit history, types of credit you hold, and new requests for credit. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.
However, your whole credit story may be more complex. Lenders will consider anything that may give clues about your ability to repay – such as these factors.
Employment – A stable employment record indicates a high likelihood of steady income and lower risk of non-payment of debts. Conversely, if you have a history of job-hopping or long gaps without work, you may be denied credit or charged a higher interest rate according to the risk you present.
Debt-to-Income Ratio (DTI) – Your DTI is your total debts divided by your income on a monthly basis. For large loans like mortgages, DTI is one of the most important factors. It shows how much of your income is devoted to existing bills and how much financial shock you can handle and still pay your bills. For mortgages, a typical upper limit for DTI is 43% – although it is possible to get a mortgage at higher DTI ratios under certain conditions.
Public Records – Bankruptcies, tax liens and civil judgments are all negative events that will cause creditors to give you closer scrutiny – especially if the actions are relatively recent. Bankruptcies will appear on your credit report and are integrated into your credit score, but liens or judgments don’t necessarily appear there.
Expenses – DTI gives a snapshot of your expenses relative to your income at any point in time. A lender may want a broader view to see if you’re going in the wrong direction financially. Are you spending continually larger amounts and building up larger credit balances over time? That’s a red flag for any credit request.
Savings/Cash Access – Do you have an emergency fund that can help you absorb a financial shock? Assets can give lenders greater assurance that you can pay back a loan in case of financial emergency, as long as those assets are relatively liquid.
Purpose of the Loan – For personal loans where the intention is not obvious (unlike home mortgages or student or auto loans), the lender may want to know what you plan to do with the money. A lender may be eager to loan you money for home improvement, but not interested in funding your new line of edible golf tees or solar-powered ink pens.
Cell Phone Numbers – Lenders don’t care who you call – nor is it any of their business who you call – but they can check the amount of time you keep a particular cell phone number as a measure of stability. Some credit scoring models also consider cell phone and cable bill payment histories, a helpful thing for young adults with little else to go on to show good payment habits.
Want to know if you’re a good credit risk? Think like a lender and objectively consider all these factors before you decide to apply for a loan. You may want to make improvements before the application to get a favorable interest rate – or you may need to make adjustments in order to qualify for credit at all.
If you want to reduce your interest payments and lower your debt, join MoneyTips.