There was a time when borrowing money from a bank was as easy as knowing your banker and shaking his hand. If you have tried to get loans in modern times, you know the process is more complicated now. Lenders decide if you qualify for credit based on your income, credit score, existing /recent debts and a number of other things.
More often than not, your information is plugged into a computer and the computer makes the decision as to whether the lender will give you credit. Let’s look at some of the mysteries involved in this process.
How Your Credit Rating Affects Your Chances to Get Loans
This is the biggest qualifier. If you have good credit, you are over halfway there. If you have poor credit, you are up against a challenge.
Three major agencies report your credit history: Equifax, Experian and Trans Union. Whenever you take out loans or have credit cards, the agencies note your payment history on your credit report. The information includes the account balance, timeliness of the payments and duration of the account.
The report will also disclose other information the agency has such as employers and residences past and present as well as duration, contact phone numbers, date of birth, recent credit inquiries, repossessions and social security number. If you have any public records such as bankruptcies, judgments, liens or unpaid child support, those will appear on the report as well.
Your Debt-to-Income Ratio
You can have great credit, but if you are over leveraged, a loan officer may decide not to give you any loans. In other words, if you are living beyond your means and have little money left after you make your loan payments each month, you probably will not get financing.
Many experts agree that the monthly payment on your debts should be no higher than 36 percent of your monthly income. Considering that they also agree that a mortgage payment should be around 28-33 percent of your income, it does not leave much room for other debt.
Before lenders award loans, they like to see stability in the borrower. They look for how long a person has worked for the same employer as job-hoppers may be high risks for lenders. They also look for residential stability; people who move around a lot typically find it harder to get financing than those who have lived in the same place for two or more years.
Having No Credit is Sometimes Worse than Having Bad Credit
For people who have no credit, lenders have nothing on which to base their decision. For those who have bad credit, though, a lender can make a decision based on the borrower’s past.
For example, if the loan officer learns that the borrower had good credit for many years before it turned bad, they may look closer at the customer’s situation. Maybe the customer experienced a layoff and is now back at work and showing stability. In that case, the loan officer may take a chance with them. If you have no credit, start building it as soon as you can. Begin by acquiring small loans and credit cards with a low limit, even if you have to secure them. While you are doing this, make sure to keep your debt-to-income ratio low and make all payments on time. Soon your credit score will become higher and you will be able to get financing for larger things such as a car or a home.