How Lenders Get My Credit Score

The decision-making procedure of loan confirmation isn’t smoothed. Lenders have to get your credit score. One lender could focus completely on the established guidelines of that specific lending institution and credit scoring; another lender may take into account the general impression you gave throughout your interview. Whatever technique the lender may use, the assessment of your creditability and your capability to repay the debt is the basic premise of credit approval. You can categorize the various factors concerned in getting an individual’s credit as character, capacity, and collateral.

Character

Your character forms your honesty, credibility, and willingness to repay your debt. The lender reviews your credit report, that indicates ratings of your past and present credit and answers such questions as:

• Do you repay your debts on time?
• Do you periodically exceed your credit limit?
• Where do you have attainable credit currently?
• How much credit do you have outstanding?
• Where have you had credit within the past?

The lender also looks for signs of stability:

• How long have you been on the job?
• How long have you been in the same line of work?
• Is your income verifiable?
• Do you own or rent your home?
• How long have you lived in the same place?

Stability is the key word here in employment and residence and in how well you have managed your past and present credit. The lender wants to know whether you will do the most to repay your debts even if you meet with a sudden financial setback. The lender judges your character and reputation.

Capacity

Capacity revolves around your ability to repay your debt. Your potential lender asks about your monthly income and current expenses in order to examine an important aspect of your capacity, the debt-to-income ratio. You can calculate this ratio yourself. Calculate the averages of three months of your income and expenses. Simply add the three months of expenses and divide by three to find the average. Do the same with the three months of income. Add the average of your three months of expenses to the monthly payment of the proposed loan you are requesting. Then, divide that amount by the average of your three months of income. The result is your debt-to-income ratio.

The debt-to-income ratio is a guideline to help you and the lender determine how much monthly debt your income can handle. If the ratio is over 45 to 50 percent, the financial institution may not give you any more credit because your income may not be able to handle additional expenses. The debt-to-income ratio varies among financial institutions; some allow for more debt than others do. Ask before you apply.

Collateral

Collateral includes stocks, bonds, CDs, savings accounts, or property that you own and that you can pledge as security of repayment of your loan. Having collateral to pledge helps you overcome other areas of your loan application that may be lacking credibility or stability — if your lengths of employment and residence are too short to qualify for the loan you want. You can liquidate, or cash in, any assets such as savings accounts, certificates of deposit, stock investments, or property to pay off your loan if you are unable to do so otherwise.