A high credit score can be a huge asset going into a loan application, but there are many factors that lenders look at when determining your creditworthiness and scoring high in those areas can help make up for a less than stellar credit score.
As a former bank lender and portfolio manager, I was trained to recognize any indication that someone may not be a good credit risk. It was our practice to go through the application and score several factors prior to requesting a credit report since each report cost the bank money. If we could determine the applicant was not a strong credit risk without a credit score, there was no need to go to the expense of ordering a report. On the other hand, strong scores in these other areas could help mitigate the damage done by a few late payments.
It is vitally important that you fill out the loan application as thoroughly and accurately as possible. Some of the questions may seem intrusive but they provide the lender with information necessary to determine whether you are a good credit risk.
- Length of time at your current address and length of time at former addresses
- Length of time on job and length of time at former jobs
- Length of relationship with the financial insitution from which you are requesting the loan
Lenders want to know the stability of certain areas of your life. People who live at the same address for several years and hold down the same job for a long period of time tend to be better credit risks. There are plenty of positive reasons for a job or residence change and there should be room on a loan application to explain anything that you think might make you look like a poor risk.
Ability to Pay
- Debt ratio based on the income/debt statement given on the application
- Simple asset statement or more complex balance sheet depending on size and type of loan
- Debt utilization
If you do not have the ability to repay the loan, there is almost nothing short of securing the loan with cash that can get your application over a bad score in this area. Your debt ratio tells the lender whether you make enough money to pay all of your monthly bills plus incidental expenses. Your asset statement or balance sheet gives the lender a snapshot of the assets you have that might be used to pay back the loan if you lose your source of income. It will also tell them whether your assets are liquid or can be easily liquidated in the event you get in trouble financially. Finally, debt utilization tells the lender whether you are always borrowing at your maximum limit.
Self-Reported Credit History
- Type of credit you have on your record
- Type of company current debt is issued by
Most applications for credit will have a section where you are required to fill in current debts. Here you record the company that issued the debt, the total amount of indebtedness, required monthly payment and whether each loan is secured or unsecured. Like credit reporting agencies, banks and financial institutions do not look at all creditors equally and too many loans with certain types of companies can damage not only your credit score, but your loan score as well. Finance companies are downrated and credit with department stores doesn’t give as many points as a bank issued credit card which doesn’t give as many points as a bank issued loan.
Willingness to Pay
- Utility payments
- Rent payments
- Credit report
The easiest way for a potential lender to determine whether you have a willingness to pay is to check past payment records found on a credit report. If you don’t have any previous credit, some lenders will accept statements or payment histories from landlords and utility companies. If you have a large number of late payments or are in default on other loans it will be difficult, if not impossible, to secure more credit.
It is much easier to explain weaknesses in an application when you are sitting in front of the lender. I sometimes made exceptions for people who scored strong on stability but had a few late payments. It showed in the slightly higher rate they were charged, but they got the loan they needed.
There are a lot of details creditors use to determine whether you are a solid credit risk. Credit history and a credit score are often the last details collected in the loan application process. You can improve your chances of getting a loan if you pay attention to other areas of the application and share details that prove you are a solid credit risk with the ability and willingness to pay your debts.