Have you ever wondered what it was like to look at your credit or loan application from across the desk?
When lenders review your credit report, “these really are common sense decisions,” said Rod Griffin, senior director of consumer education for Experian, one of the three major credit bureaus.
“Creditors and lenders find it really boring to be hot and sexy,” he said. “Everything that is unusual is scary. “
When you apply for a loan or a credit card, lenders often check your credit rating, your credit report, or both. If they don’t like what they see, you’ll be rejected – or approved, but on less favorable terms.
It’s not just new candidates who are being scrutinized. Credit card issuers, for example, periodically review their customers’ records.
If you want the best deals and terms, here are seven things you – and your lenders – don’t want to see.
1. Late or missed payments
This one gets to the heart of what lenders really want to know: “Are you going to pay your bills?” said Francis Creighton, president and CEO of the Credit Data Industry Association, the member organization of the credit bureaus.
What you might not realize: Everything that creditors and lenders consider to be missed payments, other than payments made on time.
“What matters is that you make the payment on the due date,” Griffin said. “If you only make a partial payment – in terms of the minimum payment due – that’s a bad sign. Partial payment is late payment.
2. Seizures, bankruptcies
These are the two worst things you can have on your credit history – and both will give future lenders a break, Griffin said.
So how could these events prompt a lender to extend credit?
“Somewhere between pretty scared and terrified,” he said. “Especially if it’s recent.
Seeing these items on your history “doesn’t mean they won’t make that loan,” Creighton said. “But they can price it differently.”
The foreclosures stay on your credit report for seven years. Chapter 7 bankruptcies – total liquidation – stay on your credit report for 10 years.
Chapter 13 bankruptcies – in which consumers reorganize to pay off all or part of their debts – stay in your credit history for seven years.
If you had a short sale, you won’t find those exact words on your credit report, Griffin said. Instead, it will say “settled” or “settled for less than originally agreed”.
Like foreclosures, short sales also stay in your credit history for seven years. It is viewed by creditors as “a little better than foreclosure,” he said.
That said, the more a foreclosure, bankruptcy, or short sale has occurred in the past – the more financially the consumer has recovered – the less impact it will have on their credit, Griffin said.
3. Maximum cards
“A high balance, relative to the credit limit on your cards, is the second most important factor in your credit score,” Griffin said.
The portion of your credit that you use is roughly 30% of your score.
High balances or maxed out cards are “an indication of financial hardship,” he said. “Ideally, you would pay your card in full every month and keep your usage as low as possible.
“What we are seeing is that the people with the best score have a usage rate (the balance divided by the credit limit) of 10% or less.”
This goes for both individual cards and the collective total of the consumer’s credit lines and card balances, he adds.
A basic rule of credit score was to keep the utilization rate below 30%. “But 30% is the maximum, not a goal,” Griffin said. “It’s the cliff. If you go beyond that, the scores will drop sharply. Conversely, “the more you are below 30%, the less likely you are to default,” he added.
Tip: As your usage rate changes from month to month, your score will also change.
Griffin remembers a family holiday where he put everything – travel, meals, gifts – on plastic. Its utilization rate increased by 7% and its credit rating fell by 40 points.
In January, he paid the bills for the card in full and his score returned to normal. “So don’t panic about it if your score is good,” Griffin said.
4. Someone else’s debt
When you co-sign a credit card or loan, all of the debt is written on your credit report. So, as far as lenders go, you carry that debt yourself, and it will be included in your debt load when you apply for a mortgage, credit card or any other form of credit, said John Ulzheimer, a former the credit industry. executive and chairman of the Ulzheimer group.
If the person you co-signed for stops paying, misses payments, or pays late, this will likely be reflected on your credit report.
So if a friend or family member who needs a co-signer tells you it’s painless because you’ll never have to part with it, tell them it’s not true.
Co-signing means agreeing to repay the obligation if the borrower defaults and allowing that debt, along with any late or non-payment, to count against you the next time you apply for a loan.
Co-signing for a friend or family member is playing well at the Thanksgiving table, Ulzheimer said, “but it doesn’t work well in the underwriting office.”
5. Minimum payments
Creditors make money when you keep a balance, but lenders don’t like to see only minimum payments on your credit report.
“This suggests that you might be under financial stress,” said Nessa Feddis, senior vice president of the American Bankers Association. “You might be more at risk of defaulting. “
Sometimes paying the minimum doesn’t signal a problem. For example, paying minimums in January, after spending vacation time, is understandable.
But consistently paying minimums month after month indicates that you might be struggling to pay off the balance. Lenders who see this on a credit report may be reluctant to extend additional credit.
6. A flurry of loan requests
This one isn’t going to scare lenders so much as it will cause them to reconsider what’s going on in your financial life, Griffin said.
For someone who pays all of their bills on time and has no balance, a flurry of demands could be perfectly harmless. But for someone making minimum or late payments, and transferring balances, it’s a sign of financial stress and a drag on lenders.
“The surveys suggest something to lenders,” Creighton said. “And that is valuable information.”
New credit inquiries stay on your credit report for two years and affect your credit score for one year. In the FICO scoring model, the new credit counts for 10% of the score.
“They are the least important factor in credit scores and the last thing creditors are going to look at,” Griffin said.
Tip: Certain types of credit applications – for mortgages, car loans, or student loans – are grouped together and counted as one application by credit scoring formulas. That’s because when it comes to those big purchases, lenders know you’ll want to shop – and that’s smart.
While the new scoring formulas group similar loan applications together if done within 45 days, older versions only have a 14-day window.
You have no way of knowing which version potential lenders are using. For added security, keep all requests within 14 days.
7. Credit card advances
“Cash advances, in many cases, indicate desperation,” Ulzheimer said. “Either you lost your job or you are underemployed. Nobody makes cash advances on a credit card because they want money in a bank somewhere. You usually borrow from Peter to pay Paul.
Here’s how a cash advance will send a wake-up call to lenders who review your credit report: First, the cash advance is immediately added to your debt balance, reducing your available credit and your credit score. credit for all potential lenders.
Second, large card issuers regularly reassess the behavior of their customers. They do this by pulling credit reports, FICO scores, and accounts receivable histories and running them through their own credit scoring systems, explains Ulzheimer. Many rating models penalize cash advances because they are considered risky, he says.
If the card issuer lowers your credit limit or cancels your account, it can damage your credit score and make other lenders more wary.
(Visit Bankrate online at bankrate.com.)
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