Your credit reports contain a lot of information, but some items are more important than others.
What factors do lenders take into account when they review your credit report? This is an easy question with a difficult answer because there are no common criteria that all lenders use to evaluate potential borrowers. It can depend on both the lender and the type of loan.
Of course, there are some items that will increase or decrease your odds of approval just about everywhere. Examining the components of your FICO score—the most popular credit scoring model—is a smart place to start. FICO scores range from 300 and 850, with anything 670 or above considered good or better. It will probably be difficult for you to borrow money at favorable interest rates, if at all, if your score is significantly lower than that.
Your credit score is a crucial part of your financial life, acting as a report card for your financial responsibility. It’s a three-digit number, typically ranging from 300 to 850, that summarizes your credit history and helps lenders assess your creditworthiness. In simpler terms, it tells lenders how likely you are to repay borrowed money on time.
What Lenders See in Your Credit Score
When lenders look at your credit score, they’re essentially getting a snapshot of your financial behavior. This snapshot includes:
- Payment History: This is the most significant factor, accounting for about 35% of your credit score. It shows how consistently you’ve paid your bills on time, including credit card payments, loans, utilities, and rent.
- Amounts Owed: This factor, accounting for about 30% of your score, reflects how much debt you currently have compared to your available credit. Lenders want to see that you’re managing your debt responsibly and not overextending yourself.
- Length of Credit History: This factor, accounting for about 15% of your score, shows how long you’ve been using credit responsibly. A longer credit history generally indicates greater stability and reliability.
- Credit Mix: This factor, accounting for about 10% of your score, looks at the variety of credit accounts you have, such as credit cards, installment loans, and mortgages. Having a mix of credit shows lenders that you can handle different types of debt.
- New Credit: This factor, accounting for about 10% of your score, considers how often you’ve applied for new credit recently. Opening too many new accounts in a short period can negatively impact your score.
How to Improve Your Credit Score
Understanding what lenders look at in your credit score gives you the ability to take action to raise it. Here are some tips:
- Pay Your Bills on Time: This is the single most important thing you can do. Even a single late payment can significantly impact your score. Set up automatic payments or reminders to ensure you never miss a due date.
- Keep Your Credit Utilization Low: Aim to use less than 30% of your available credit. This shows lenders that you’re not maxing out your credit cards and are managing your debt responsibly.
- Don’t Apply for Too Much Credit: Every time you apply for new credit, a hard inquiry is placed on your credit report, which can temporarily lower your score. Limit your applications to only when necessary.
- Become an Authorized User: If you have a friend or family member with good credit, ask if you can become an authorized user on their credit card. This can help you build your credit history without having to open a new account.
- Dispute Errors on Your Credit Report: Review your credit reports regularly and dispute any errors you find. Inaccurate information can negatively impact your score.
Remember, your credit score is a dynamic number that can change over time. You can access more financial opportunities, reduced insurance premiums, and better interest rates by working to raise your credit score.
What Else Do Lenders Consider?
Although it is a significant factor in determining your eligibility for loans and other credit, lenders take other factors into account.
Lenders, for instance, typically want to know about your employment history, assets (like bank accounts), and income—none of which are recorded in your credit reports or used to determine your credit score.
In many instances they will want to know what you are planning to do with the money. For instance, when you apply for a mortgage, they will ask to see documentation about the house you want to buy and will insist on an unbiased appraisal to ensure you are not paying too much for it.
If the loan is secured, they will want to know about the collateral you are putting up. For instance, when it comes to mortgages, the house itself usually acts as collateral, and the lender has the right to seize it if you don’t make your payments. With a car loan, the vehicle usually serves that purpose.
In contrast, credit cards are typically unsecured, meaning that the issuer is solely dependent on its evaluation of your creditworthiness.
The Length of Your Credit History
An established track record of responsible credit use is good for your credit rating. Lenders especially like to see that you have had some credit accounts open for a considerable amount of time and have kept them in good standing. The length of your credit history makes up 15% of your FICO score.
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FAQ
What does your credit report tell a lender about you?
What does your credit score mean to lenders?
What is your credit score designed to tell lenders?
What credit score do lenders like to see?
What does a credit score tell you?
A credit score is a three-digit number — calculated from the data in your credit reports — that is designed to predict how likely you are to repay borrowed money. But a score doesn’t tell lenders everything, so many also look at your credit reports from the three major credit bureaus.
Why do lenders check your credit score?
When lenders run credit checks, they’re trying to assess what kind of borrower you’ll be, and going over your credit score and report can help them understand how you’ve historically managed credit. Late payments, maxed-out credit cards and accounts in collections may paint you as an unreliable borrower.
What do Lenders look for in a loan?
For example, lenders will usually want to know about your income, assets (such as bank accounts), and employment history—none of which are included in your credit reports or factored into your credit score. In many instances they will want to know what you are planning to do with the money.
How do I know if my credit score is good?
Looking at what makes up your FICO score (the most widely used credit scoring model) is a good place to start. FICO scores range from 300 and 850, with anything 670 or above considered good or better. If your score is much lower than that, you will probably find it difficult to borrow money at favorable interest rates and maybe at all.