Whether you’re buying a home, financing a car purchase or simply applying for a credit card, your loan application is more than your credit history. While your credit history is an important factor, there are three key aspects that lenders consider when making a decision:
How responsible are you with credit?
Lenders really want to know one thing: Are they going to get their money back? To figure this out, they’ll look at your payment history, your debt-to-income ratio and the length of your credit report.
When a lender reviews your payment history, they are looking to make sure you have paid your debts or commitments in a timely manner. While they will likely look at your entire payment record, your most recent payment history will be weighted more heavily. If you had some late payments three years ago but have paid on time since then, a lender might overlook it. But, if you made regular on-time payments and have recently fallen behind, a lender may be hesitant to extend you credit.
Debt-to-income ratio is exactly what it sounds like: the amount of debt you’re paying off compared to the money you’re bringing in. If you already have a large amount of debt and apply for even more, the lender may worry about your ability to repay new debt and decide not to give you a loan. The ideal debt-to-income ratio can vary, but in general it is good to aim for a total debt (including the new loan) that is less than 36% of your income.
The length of your credit history shows the amount of “experience” you have with credit, with a long history being the best option. To calculate this, some lenders look at the average length of all your credit accounts, while others look at the oldest account.
It’s a good idea to avoid opening or closing any credit accounts before applying for a loan, as new accounts can shorten the average length of your credit history and decrease your chances of getting your loan. Also, lenders may wonder why you suddenly need a bunch of new lines of credit.
How committed are you to the purchase?
Mortgages, auto loans and other loans not including credit cards almost always require a down payment, even if you have a stellar credit history.
How stable does your long-term financial picture look?
Lenders are also interested in your employment history. While this isn’t on your credit report, it gives lenders such as QvCredit SG a complete picture of your financial health.
When you apply for a high-value loan such as a mortgage, your lender will check your employment, sometimes more than once, first at the beginning of the process and then again just before closing, and will probably ask how stable your continued employment is. The more stable your employment, the more likely you will be able to repay the loan.
Tips to remember before applying for a loan
Before completing any paperwork, do a financial checkup. Get your credit report (you’re entitled to a free credit report) and review it for errors or omissions.
Follow up on your credit history and detect possible errors or inaccurate information. Also, make sure that the new loan does not cause you to lose control of your budget, otherwise consider making a smaller purchase, or forego this purchase for a while. If you do eventually do so, be sure to notify your employer that someone will be calling to verify your employment. That way, they may respond more quickly to the lender’s request.
