DANA DRATCH Bankrate.com
Have you ever wondered what it’s like to watch your credit or loan application from the other side of the desk?
When lenders look at your credit report, “it really comes down to common sense decisions,” says Rod Griffin, senior director of consumer education at Experian, one of the three major credit bureaus.
“Creditors and lenders find it really boring to be exciting and sexy,” he says. “Anything unusual is scary.”
When you apply for a loan or a credit card, lenders very often check your credit score, your credit report, or both. If they don’t like what they see, you will be rejected or approved, but with less favorable conditions.
And it’s not just new applicants who are screened. 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
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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 the credit bureaus.
What you may not realize: Outside of deadlines, minimum payments are seen by creditors and lenders as missed payments.
“What matters is that you make payment by the due date,” says Griffin. “If you’re only making a partial payment, compared to the minimum payment due, that’s a bad sign. A partial payment is a late payment.
When it comes to your credit score, making timely payments is the most important factor. It accounts 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 pause, says Griffin.
So how would these events induce a lender to extend credit?
“Somewhere between pretty scared and terrified,” he says. “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 fix it differently.”
Foreclosures remain on your credit report for seven years. Chapter 7 bankruptcies – full liquidation – remain on your credit report for 10 years. Chapter 13 bankruptcies — where consumers reorganize to pay off some or all of their debts — stay on 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 on your credit history for seven years. And it’s seen by creditors as “better than a bit foreclosure,” he said.
That said, the farther in the past a foreclosure, bankruptcy or short sale has occurred — and the longer the consumer has recovered financially — the less impact it will have on their credit, Griffin says.
3. High balances and maxed out cards
“A high balance, relative to your cards’ credit limit, is the second most important factor in your credit score,” says Griffin.
The amount of credit you use is about 30% of your score.
And high balances or maxed cards are “an indication of financial hardship,” he says. “Ideally, you would 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 highest score have a usage rate [the balance divided by the credit limit]10% 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 credit score rule of thumb was to keep the utilization rate below 30%. “But 30% is the maximum, not a goal,” warns Griffin. “It’s the cliff. If you go beyond that, the scores will drop precipitously. Conversely, “the more you are below 30%, the less likely you are to default,” he adds.
Tip: Your usage rate changes from month to month.
Griffin recalls a family holiday when he wrapped everything – travel, meals, gifts – on plastic. His utilization rate increased by 7% and his credit rating fell by 40 points.
In January, he paid the card bills in full and his score was back to normal. “So don’t freak out about it if your score is good,” Griffin says.
4. Someone else’s debt
When you co-sign a credit card or loan, the entire debt is listed on your credit report. So as far as lenders go, you carry that debt yourself, and it will be included in your indebtedness when you apply for a mortgage, credit card, or any other form of credit, says John Ulzheimer, an alumnus of the credit industry. executive and chairman of the Ulzheimer Group.
If the person you co-signed for stops paying, misses payments, or pays late, it will likely reflect 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 a penny, tell them it’s not true. . Co-signing means agreeing to repay the obligation if the borrower defaults and allowing that debt, and 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, Ulzheimer says, “but it doesn’t work well in the underwriting office.”
5. A history of minimum payments
Creditors make money when you have a balance, but lenders don’t like to see only minimum payments on your credit report.
“It suggests you may be in financial trouble,” says Nessa Feddis, senior vice president of the American Bankers Association. “You might be at higher risk of defaulting.”
Occasionally paying the minimum does not signal a problem. For example, paying minimums in January after holiday spending is understandable. But consistently paying minimums month after month indicates that you might struggle 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 one isn’t going to scare off lenders so much as it will get them to take a second look at what’s going on in your financial life, says Griffin.
For someone who pays all their bills on time and has no balance, a flurry of requests could be perfectly harmless. But for someone making minimum or late payments and transferring balances, it’s a sign of financial stress and a turn off for lenders.
“The surveys suggest something to lenders,” says Creighton. “And that’s valuable information.”
Serious inquiries for new credit stay on your credit report for two years and affect your credit score for one year. In the FICO scoring model, new credit counts as 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.
Tip: Certain types of credit applications—for mortgages, auto loans, or student loans—are grouped together and counted as one application by credit score formulas. Indeed, when it comes to those big purchases, lenders know you’ll want to shop around – and that’s smart.
While the new scoring formulas group together similar loan applications if made within 45 days, the 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 requests within 14 days.
7. Cash advances on a credit card
“Cash advances, in many cases, indicate desperation,” Ulzheimer says. “Either you have lost your job or you are underemployed. Nobody takes cash advances on a credit card because they want money sitting in a bank somewhere. You generally borrow from Peter to pay Paul.
Here’s how a cash advance will send a red flag to lenders checking your credit report: First, the cash advance is immediately added to your debt balance, reducing your available credit and credit score so that all potential lenders can see it.
Second, major card issuers regularly re-evaluate the behavior of their customers. They do this by pulling credit reports, FICO scores and customer account histories and running them through their own credit scoring systems, Ulzheimer says. Many scoring 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 hurt your credit score and make other lenders more suspicious.