Have you ever wondered what it was like to look at your credit or loan application from the other side of the desk?
When lenders review your credit report, “these really are common sense decisions,” says 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 says. “Anything unusual is scary. ”
When you apply for a loan or a credit card, lenders very often check your credit rating or some lenders offers no credit checks, your credit report, or both. If they don’t like what they see, you will be rejected or approved, but on less favorable terms.
And it’s not just new candidates who are being scrutinized. Credit card issuers, for example, also 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?” says Francis Creighton, president and CEO of the Credit Data Industry Association, the member organization of credit bureaus.
What You May Not Realize: Anything not done on time, minimum payments are viewed by creditors and lenders as missed payments.
“What matters is that you make the payment on the due date,” Griffin explains. “If you’re only making a partial payment, in terms of the minimum payment due, that’s a bad sign. Partial payment is late payment.
When it comes to your credit score, making timely payments is the most important factor. It counts for 35% of your credit score.
2. Foreclosures and bankruptcies
These are the two worst things you can have on your credit history – and both will give future lenders a break, Griffin says.
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 in your history “doesn’t mean they won’t make that loan,” says Creighton. “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, where consumers reorganize to pay off some or all 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 says. 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. And that’s seen by creditors as “a little better than foreclosure,” he says.
That said, the longer a foreclosure, bankruptcy or short sale has taken place and the more financially the consumer has recovered, the less impact it will have on their credit, Griffin says.
3. High balances and maximum cards
“A high balance, relative to the credit limit on your cards, is the second most important factor in your credit score,” says Griffin.
The portion of your credit that you use is roughly 30% of your score.
And high balances or maxed out cards are “an indication of financial hardship,” he says. “Ideally, you would pay your card in full every month and limit your use as much as possible. What we are seeing is that the people with the highest score have a higher utilization rate. [the balance divided by the credit limit], 10 percent or less.
And that 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 warns. “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 adds.
Advice: As your usage rate changes from month to month, your score will also change.
Griffin remembers a family vacation 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 says.
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, says John Ulzheimer, a former lender of the lender. 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 works well at the Thanksgiving table, says Ulzheimer, “but it doesn’t work well in the underwriting office.
5. A history of 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 may be under financial stress,” says Nessa Feddis, senior vice president of the American Bankers Association. “You may be at a higher risk of default. ”
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 won’t scare lenders so much as it causes them to reconsider what’s going on in your financial life, Griffin says.
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 inquiries suggest something to lenders,” says Creighton. “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’re the least important factor in credit scores and the last thing creditors are going to look at,” says Griffin.
Advice: Certain types of credit applications (mortgages, auto loans, or student loans) are aggregated and counted as one application by the 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. And you have no way of knowing which version potential lenders are using. For added security, keep all requests within 14 days.
7. Cash advance on credit card
“Cash advances, in many cases, indicate desperation,” says Ulzheimer. “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.