What Do Creditors Look For When Giving Credit?

When you apply for loans or credit cards, credit checks are frequently performed. However, you might be curious about what information is truly disclosed about you. Examining your credit score and report can help lenders understand how you have historically handled credit as they conduct credit checks in an effort to determine what kind of borrower you will be. Late payments, maxed-out credit cards and accounts in collections may paint you as an unreliable borrower. However, it usually works to your advantage if you have a long history of making on-time payments, low credit balances, and paid-off accounts.

Here’s how lenders determine whether to lend to you based on your credit report, credit score, and other information from your credit application.

Obtaining credit is a crucial aspect of modern financial life, enabling individuals to access essential resources like housing, transportation, and education. However, creditors, the institutions that provide credit, carefully evaluate potential borrowers to minimize risk and ensure repayment. Understanding what creditors look for when giving credit empowers you to present yourself as a responsible and reliable borrower, increasing your chances of approval and securing favorable terms.

Key Factors Considered by Creditors

Creditors analyze various factors to assess your creditworthiness, each playing a crucial role in their decision-making process. These key factors can be broadly categorized into five primary areas:

1. Credit History:

Payment History: This is the most significant factor, accounting for 35% of your FICO score. It reflects your track record of making timely payments on past credit obligations, including loans, credit cards, and utilities. A consistent history of on-time payments indicates reliability and reduces the risk of future defaults.
Amounts Owed: This factor, representing 30% of your FICO score, assesses the total amount of outstanding debt you currently hold. Creditors prefer borrowers with lower debt levels, as it indicates a greater capacity to manage existing financial commitments and take on new ones.
Length of Credit History: The duration of your credit history, accounting for 15% of your FICO score, demonstrates your experience in handling credit responsibly over time. A longer credit history generally signifies a more established and reliable borrower.
New Accounts: Creditors scrutinize the number of recently opened credit accounts, comprising 10% of your FICO score. A sudden surge in new accounts can raise concerns about overspending and potential difficulty managing multiple financial obligations.
Credit Mix: This factor, accounting for 10% of your FICO score, evaluates the diversity of credit products you utilize, such as credit cards, installment loans, and mortgages. A balanced credit mix demonstrates your ability to handle various types of credit responsibly.

2 Income and Employment:

Your income and employment history are good indicators of your ability to repay outstanding debt. Income amount stability, and type of income may all be considered. The ratio of your current and any new debt as compared to your before-tax income known as debt-to-income ratio (DTI), may be evaluated. A lower DTI suggests a greater capacity to manage financial obligations.

3. Collateral:

For certain types of loans, such as mortgages and auto loans, creditors may require collateral, which is an asset pledged as security for the loan. The value and liquidity of the collateral play a significant role in the creditor’s decision. For instance, a home with high market value and easy salability provides greater assurance of repayment in case of default.

4. Purpose of the Loan:

Creditors may consider the intended purpose of the loan when assessing your application. For example, a loan for homeownership or education may be viewed more favorably than a loan for discretionary spending or debt consolidation.

5. Credit Inquiries:

Your credit score may be impacted by the quantity of recent credit inquiries, or requests for your credit report made by prospective creditors. A large number of inquiries in a brief amount of time could be cause for concern regarding potential overextension and excessive credit seeking.

Additional Considerations:

Beyond these primary factors, creditors may also consider other aspects, including your age, marital status, and residency. They may also review your banking history and any public records related to bankruptcies or lawsuits.

Enhancing Your Creditworthiness:

By understanding what creditors look for, you can take proactive steps to enhance your creditworthiness and increase your chances of securing favorable credit terms. Here are a few key strategies:

Maintain a consistent history of on-time payments: This is the most crucial factor in building a positive credit history.
Keep your credit utilization low: Aim to use less than 30% of your available credit to demonstrate responsible credit management.
Avoid opening too many new credit accounts in a short period: Focus on establishing a stable credit history with existing accounts.
Maintain a diverse credit mix: Utilize various credit products responsibly, such as credit cards and installment loans.
Monitor your credit reports regularly: Check for errors and dispute any inaccuracies promptly.
Manage your debt effectively: Keep your debt-to-income ratio low and prioritize repayment of outstanding balances.
Maintain a steady income and employment history: This demonstrates financial stability and reduces risk for creditors.

By using these techniques, you can demonstrate that you are a trustworthy and responsible borrower, which will improve your chances of getting credit approved and getting good terms. Recall that establishing and preserving good credit is a continuous process that calls for persistent work and prudent money management.

How to Improve Your Credit Before Applying

Before applying with a lender, start by checking your credit score and report. This will help you determine the kinds of credit cards and loans that you might be eligible for. You can register for free credit monitoring with alerts that notify you when changes have been made to your credit file, or you can view your Experian FICO® Score and credit report at any time.

Unless your credit score is already top-tier, theres always room for improvement. Additionally, going from “good” to “very good” credit, for instance, could make it possible to get better terms, lower interest rates, or even just a higher chance of approval. There are steps you can take to raise your credit score even though there isn’t a quick fix for your credit. Here are a handful of tips to consider:

Review your credit scoring risk factors. These are displayed alongside your Experian credit report and score, and they’re a great place to start if you want to raise your score.
Practice good credit habits. Pay all of your bills on schedule, maintain a low credit card balance, and avoid making unnecessary credit applications.
Check out Experian Boost®ø . Using Experian Boost to add timely utility, phone, and streaming service payments to your credit file could help you improve your scores.
Give yourself time. The longer your track record of timely payments, the greater the benefits associated with those payments. If you have negative credit marks, they will eventually have less of an effect on your scores and eventually disappear completely. It could take a few billing cycles for your credit score to fully reflect the reduction in credit utilization that you made by paying off credit card balances. In summary, there has never been a better moment to begin building credit if your goal is to raise your score in order to increase your loan or credit card options.

If your credit file is “thin” (having fewer than five credit accounts) or you don’t have much of a credit history, the same advice is applicable. It may take time to build the credit score you aspire to, so start working on it now. Building good credit from scratch may take multiple steps. You may need to begin with a secured credit card or start with a credit-builder loan. Your good credit history will eventually fill your credit report and raise your score as long as you handle your credit sensibly and keep up with all of your payments on time.

What Is Considered a Good Credit Score?

While your credit score provides a quick assessment of how well you manage credit, your credit report provides a detailed credit history. Using data from your credit report, credit scoring models create numerical scores ranging from 300 to 850. Although the precise algorithms used to determine these scores are not known to the general public, it is commonly known that there are factors that affect credit scores. FICO, whose scores are used in most consumer lending decisions, breaks down the factors as follows:

Payment history: Making consistent, on-time payments builds a strong foundation for your credit score.
Amounts owed: It’s preferable to use less of your available revolving credit than more. Loan repayment progress is also taken into account in this factor.
Length of credit history: Having long-standing accounts shows stability.
Credit mix: You can manage different kinds of credit by having a varied mix of installment loans and revolving credit cards.
New credit: Getting new credit isn’t always a bad thing, but applying for credit frequently can make you seem like a bigger risk to lenders.

Here are some examples of FICO credit score ranges and how they could apply to credit applications. How does your credit score compare?

How Your FICO® Scores☉ Stack Up With Lenders
800 – 850 Exceptional	Easy approvals Lowest interest rates and fees Best available lending terms
740 – 799 Very good	Likely to find many attractive lending options Better interest rates and terms than those scoring in the “Good” range
670 – 739 Good	“Acceptable” borrowers to many lenders Broad array of loans and cards available May pay higher interest rates than those in higher scoring ranges
580 – 669 Fair	May not qualify for loans from traditional lenders Interest rates may be significantly higher than for borrowers with higher scores
300 – 579 Poor	Likely to be declined for many loans and cards Large security deposits may be required to open utility accounts or rent an apartment

There is no single credit score that is universally regarded as “good enough” for all lenders and all types of credit, even though scores of 670 and above are considered “good” when applying for credit. For example, your credit score will need to be much higher than someone else’s to be eligible for a rewards card with a large credit limit and lots of benefits. With a higher credit score, youll often be able to access better rates and terms. However, if your score isn’t very good, you can either accept the rates and terms you qualify for right now or wait and work to improve it considerably.

What Do Lenders See When They Look at Your Credit Report?

FAQ

What information are creditors looking for?

Information from your application When you submit an application for a credit card or loan, you provide creditors with a variety of information, such as your name, address, annual income, whether you rent or own a home, and your monthly home payment.

What credit do creditors look at?

For the majority of lending decisions most lenders use your FICO score. Calculated by the data analytics company Fair Isaac Corporation, it’s based on data from credit reports about your payment history, credit mix, length of credit history and other criteria.

How do creditors determine if you are credit worthy?

Lenders assess your creditworthiness by taking into consideration your income and looking at your history of borrowing and repaying debt. Experian, TransUnion and Equifax now offer all U.S. consumers free weekly credit reports through AnnualCreditReport.com.

How will a creditor determine if they offer credit to you?

Creditors report your payment and debt information to credit reporting companies, which then put together credit reports that other creditors can look at when deciding whether to give you credit.

What does a lender look for in a credit report?

If you’re applying for a credit card or loan, you can expect the lender to scrutinize your credit report to determine how good a risk you are. In addition, it is likely to request other financial information from you that isn’t included in your credit report.

What does a credit score tell a lender?

But a score doesn’t tell lenders everything, so many also look at your credit reports from the three major credit bureaus. Credit reports contain your credit history, which is a record of how you’ve managed debt payments. Lenders may look for: Delinquent accounts, meaning those paid more than 30 days late. Unpaid collections accounts.

What do creditors look at when approving a new account?

Creditors look at a wide variety of factors, not just credit scores, to determine whom they approve and what terms they offer on a new account. Here’s some of the information they may consider. Editorial Note: Intuit Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors’ opinions.

What do lenders consider when applying for credit?

When you apply for credit, lenders may consider your employment, income, assets and cash flow, debt-to-income ratio, credit history information, collateral and housing status. Credit scores are an effective barometer of an individual’s credit health, and they are widely used by creditors to evaluate the potential risk of lending money to you.