Have you ever wondered what it is like to look at your loan or loan application from the other side of the desk?
When lenders look at your credit report, “It really is about making sound decisions,” said Rod Griffin, senior director of consumer education at Experian, one of the top three credit bureaus.
“Creditors and lenders alike find boring to be exciting and sexy,” he says. “Anything unusual is frightening.”
Very often when you apply for a loan or a credit card, lenders will check your credit score, your credit report, or both. If they don’t like what they see, they’ll reject you – or approve, but on less favorable terms.
Not only new applicants are examined. Credit card issuers also regularly check their customers’ files.
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 cuts to the point 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 affiliate for credit reporting agencies.
What You May Not Know: Anything other than on-time minimum payments are viewed as missed payments by creditors and lenders.
“The important thing is that you make the payment by the due date,” says Griffin. “If you only make a partial payment – in relation to the minimum payment due – that is a bad sign. A partial payment is a late payment. “
When it comes to your credit score, paying on time is the most important factor. It counts for 35 percent of your credit score.
2. Foreclosures and bankruptcies
These are the two worst spots you can have on your credit history – and both will give future lenders a break, Griffin says.
So how would these events get a lender to grant credit?
“Somewhere between pretty scared and scared,” he says. “Especially when it’s new.”
If you see these items on your history, “it doesn’t mean they won’t make this loan,” says Creighton. “But they can price it differently.”
Foreclosures will remain on your credit report for seven years. Chapter 7 bankruptcies – total liquidation – will remain on your credit report for 10 years. Chapter 13 Bankruptcies – where consumers reorganize to repay some or all of their debts – stick in your credit history for seven years.
If you’ve had a short sale, you won’t find those exact words on your credit report, Griffin says. Instead, “billed” or “billed for less than originally agreed” is displayed.
As with foreclosures, short sales will remain in your credit history for seven years. And it’s seen by creditors as “better than foreclosure by a bit,” he says.
That said, the further in the past there has been a foreclosure, bankruptcy, or short sale – and the more the consumer has recovered financially – the less that affects their creditworthiness, Griffin says.
3. High credit and maximum cards
“Having a large balance compared to the credit limit on your cards is the second most important factor in your creditworthiness,” says Griffin.
How much of your credit you use is about 30 percent of your score.
And high credit or exhausted cards are “an indication of financial difficulties,” he says. “Ideally, you should pay off your card in full every month and keep your usage as low as possible. What we see is that the people with the best scores have an occupancy rate [the balance divided by the credit limit], of 10 percent or less. “
This applies to both individual cards and the total of the consumer’s credit lines and card balance, he adds.
A rule of thumb for creditworthiness used to be to keep the occupancy rate below 30 percent. “But 30 percent is the maximum, not a target,” warns Griffin. “That’s the cliff. If you go beyond that, the scores drop sharply. ”Conversely,“ the further below 30 percent you are, the less likely you are to default, ”he adds.
Tip: As your usage changes from month to month, so does your score.
Griffin recalls a family vacation where he put everything – travel, food, gifts – on plastic. Its occupancy rate rose 7 percent and its credit rating dropped 40 points.
In January he paid the card bills in full and his score returned to normal. “So don’t panic if your score is good,” says Griffin.
4. Someone else’s debts
When you co-sign a credit card or loan, the entire debt will be listed on your credit report. So, as far as the lenders are concerned, you bear that debt yourself, and it is included in your debt burden when you apply for a mortgage, credit card, or other form of credit, says John Ulzheimer, a former credit provider executive director and president of the Ulzheimer Group.
If the person you co-signed for stops paying, misses payments, or is late paying it will likely be reflected in your credit report.
So if a friend or family member in need of a co-signer tells you it’s painless because you never have to part with a dime, tell them it’s not true. Co-signing means that you agree to repay the obligation if the borrower defaults and that this debt, as well as any late or unpaid payments, will be offset against you the next time you apply for a loan.
Co-signing for a friend or family member plays well at the Thanksgiving table, says Ulzheimer, “but not well in the underwriting office.”
5. A history of minimum payments
Creditors make money when you have credit, but lenders don’t want to just see minimum payments on your credit report.
“It suggests that you may be under financial stress,” said Nessa Feddis, senior vice president of the American Bankers Association. “You may have a higher risk of failure.”
The occasional payment of the minimum amount does not signal a problem. For example, it is understandable to pay minimum amounts in January after vacation spending. But paying minimum amounts consistently month after month suggests that you may have trouble withdrawing the funds. Lenders who see this on a credit report may be reluctant to provide additional credit.
6. A flood of loan applications
This won’t scare lenders so much as it will encourage them to take a second look at your financial life, Griffin says.
For someone who pays all of their bills on time and has no balance, a multitude of applications can be completely harmless. But for someone making minimum payments, late payments and transferring funds, this is a sign of financial stress – and a deterrent for lenders.
“Inquiries suggest something to lenders,” says Creighton. “And that’s valuable information.”
Hard requests for new credit will stay on your credit report for two years and will affect your creditworthiness for one year. In the FICO scoring model, the new loan counts 10 percent of the score.
“They’re the least important factor in creditworthiness and the last thing creditors will pay attention to,” says Griffin.
Tip: Some types of loan applications – for mortgages, auto loans, or student loans – are grouped together by credit rating formulas and counted as one request. That’s because lenders know you want to shop around on these big purchases – and that’s smart.
While newer rating formulas summarize similar credit inquiries if they are made within 45 days, older versions only have a 14-day window. And you have no way of knowing which version potential lenders are using. To be on the safe side, keep all inquiries within 14 days.
7. Cash advances on credit card
“In many cases, cash advances indicate desperation,” says Ulzheimer. “You either lost your job or you are underemployed. Nobody makes cash advances on a credit card because they want money in a bank somewhere. Usually you borrow money from Peter to pay Paul. “
So, a cash advance will send out a red flag for lenders looking at your credit report: first, the cash advance will be instantly added to your debt balance, lowering your available credit and lowering your credit score for all potential lenders.
Second, larger card issuers regularly review their customers’ behavior. To do this, they pull credit reports, FICO scores, and customer account histories and run them through their own credit rating systems, says Ulzheimer. Many of the scoring models penalize cash advances because they’re considered risky, he says.
If the card issuer reduces your credit limit or closes your account, it can hurt your creditworthiness – and make other lenders more cautious.