How Do Lenders Choose Who to Give Credit To?
How do they decide what a person’s credit limits should be?
They use the Three Cs
Character – will you repay the debt?
- Have you used credit before?
- Do you pay your bills on time?
- Do you have a good credit report?
- Can you provide character references?
- From your credit history, does it look like you possess the honesty and reliability to pay credit debts?
- How long have you lived at your present address?
Capital – what if you don’t repay the debt?
- What property do you own that can secure the loan?
- Do you have a savings account?
- Do you have investments to use as collateral?
Capacity – can you repay the debt?
- How long have you been at your present job?
- Do you have a steady job?
- What is your salary?
- How many other loan payments do you have?
- What are your current living expenses?
- What are your current debts?
- How many dependents do you have?
Your Credit Responsibilities
- Avoid buying on impulse.
- Borrow only what you can repay.
- Read and understand the credit contract.
- Pay debts promptly.
- Notify creditor if you cannot meet payments.
- Report lost or stolen credit cards promptly.
- Never give your card number over the phone unless you initiated the call.
Building Your Credit History
- Establish a steady work record.
- Pay all bills promptly.
- Open a checking account and don’t bounce checks.
- Open a savings account and make regular deposits.
- Apply for a local store credit card and make regular monthly payments.
- Apply for a small loan using your savings account as collateral.
- Get a cosigner on a loan and pay back the loan as agreed.
Credit Score Information
Your credit history is used by lenders to determine your ability and willingness to pay back a mortgage loan. The lender will review your credit report to see how you use credit and if you pay your bills on time. Lenders usually concentrate on your most recent one to two-years history unless you’ve had repeated and serious financial trouble in the past.
Factors lenders consider when examining your credit report
- Derogatory credit (collections, charge-off, late and slow pays 30-60-90 days late)
- A “pattern and practice” of derogatory credit is evaluated more harshly than a period of time that can be explained by an unusual circumstance (loss of job, hospitalization, etc.)
- Credit Score
- Lack of credit history
- Recent bankruptcy or previous foreclosure
- Public records (interest in pending legal disputes divorce, lawsuit, etc.)
- Inquiries (alert for multiple inquiries within the last year)
Understanding Your Credit Score
A credit score is a number that tells a lender how likely you are to repay a loan, or to make credit payments on time. It is also referred to as a FICO or BEACON score. A credit score is a three digit number between 300 and 900, that is generated by a computer.
It is based on the information in consumer credit reports, including your debt profile and bill-paying history. Each lender will weigh your score in a slightly different way. The higher the score, the better your eligibility for a lower-interest “A” Paper loan.
Credit Score Tips
Scores automatically improve as one’s overall credit picture gets better. Here are a few tips to help you manage your credit obligations:
- Always pay your bills on time. Mail them before the due date.
- Payoff credit card balances every month or if you do have a balance, pay more than the minimum monthly payment and keep balances low.
- Apply for credit sparingly.
- Check your credit report periodically for any inaccuracies.
- Minimize the number of times you give creditors permission to check your credit record.
- Remember that no credit score is forever. You can always improve it.