Last week, we discussed who is pulling your credit. This week, let’s take a look at what they are looking for.
In general, lenders review your credit for a few key pieces of information that will tell them if you are worthy of receiving a loan or if you are a credit risk. These include:
- Your credit score. As the most important metric, your score is going to be the key predictor for a lender of your ability to pay your debts long-term. If you have no idea what your credit score is, try our free Credit Score Estimator.
- Your credit balances. How much debt do you currently have, and, if you carry outstanding credit card balances, are you paying them down regularly?
- Your total available credit v. how much you owe. Lenders look for customer who typically carry a lower percentage of their available credit balance from month to month. For example, carrying a balance of $4,950 on a regular basis when your total available credit limit is $5,000 is not idea. But, someone carrying that same balance of $4,950 who has a $10,000 credit limit may be more desirable to a lender.
- Your debt to income ratio. How much you pay monthly on your debts versus your monthly income is yet another measure of your ability to take on more debt with the lender who is evaluating your file.
- Late Payments. Are you making debt payments late across all your debts or only some of them? Are late payments limited to a particular time period (i.e., when you were between jobs) or have they been constant over an extended period? Here is a great primer on late payments.
Keep in mind that each lender may have a different “formula” for what is acceptable and what isn’t. So, it isn’t the end of the world if you are turned down. And, if you are, ask why. It will give you a good sense of what you may need to work on.
If you were turned down because you have a “thin” credit file, you might want to consider ways to bolster your credit history. Consider having your rent payments reported or having past rent or other recurring bill payments reported. It may be just the thing your credit file needs.
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Great information! I’ve been looking for something like this for a while now. Thanks!