Credit Decision Making Process

Looking at specific criteria that lenders use in their credit decision-making process can help you gain insight into the process as a whole. Lenders look for established money management tools and evidence of living within your means.

Employment

Creditors like stability in employment and consider employees who have been on the job a long time more likely to maintain their current earning capability and to repay their debts.

Residence

Length of residence is also an indicator of your stability. Your chances of receiving approval on your loan application are more favorable if you own your home. If you rent, the credit grantor is interested in your length of your present and previous residences.

Credit grantors consider the lengths of employment and residence as major factors when initially reviewing credit applications.

Occupation and income

A professional or a skilled worker ranks higher on a credit application than an unskilled or transient worker who may have jumped from job to job.

Consistency and a steady increase in income are other important factors in the credit decision-making process. Lenders like to see a progression in your income level and long-term employment, as opposed to job-hopping, seasonal work, and a varied income.

Your assets

Having a checking and/or savings account indicates that you’re already on your way to managing your money.

Adding to your savings account and managing your checking account wisely show the lender your responsible intentions. Lenders consider these two factors important initial steps in money management.


Current outstanding obligations

A loan application requires you to list all your current debts. You must list the balances on your current loans, bank credit cards (such as Visa and MasterCard), and store charge cards. The lender can then compute your debt-to-income ratio. Hopefully, this ratio indicates that you’re managing your debt well and living within your means.

Previous credit history

After you fill out the loan application, your lender orders a credit report. After the lender reviews the credit report, he or she knows your current obligations and your payment history. The credit report shows whether you pay your bills on time or late. If the credit report shows that you were late in meeting your payments, the lender assumes that you will continue this pattern and usually rejects your application for credit. If extenuating circumstances caused your late payments, be truthful and clarify the details.


Before applying for credit, you should obtain and review your own credit report, in case you need to clear up any negative information in it. Receiving your credit report may take two to four weeks, and clearing up errors can take six months.

Accuracy and honesty are key factors in completing your loan application. Additional debts appearing on your credit report but not on your application (known as undisclosed obligations) are reason enough for loan rejection.

Lenders are human, too; they show understanding to past credit problems if you can truthfully substantiate the reason for such problems and explain how you are now correcting them.

Credit scoring

In a credit scoring schedule, points are given to various categories. As you can see from the sample scoring schedule in Figure, higher points are awarded to such areas as professional occupation, higher income, lesser debt, and owning your home.
Take a minute now to circle the numbers in Figure that apply to your situation and them add them up. If you earn more than 16 points, you have a good chance of being approved for a loan. This credit scoring guide is merely a sample to help you understand the criteria used in the credit decision-making process. It is not a concrete system that all financial institutions use.