How Lenders Evaluate Your Credit
Whenever you apply for credit – whether a mortgage, auto loan, credit card, department store card, etc. – the company from which you are seeking credit is going to check your credit record from one or more of the three major credit reporting agencies. They will most likely use a credit score such as the FICO® Score in their evaluation of risk before lending their money to you.
Each lender makes different interpretations and decisions when reviewing a credit application. Some require only a credit score and make their decision based solely on that. Most lenders consider additional information, either from your credit report or from supplemental information you provide with your application, such as proof of income.
Some lenders are conservative, meaning they only want to lend to the least risky consumers. Other lenders are happy to work with consumers who have less-than-ideal credit histories.
When evaluating your credit risk, the items that lenders generally pay the most attention to are:
- Your FICO® Score
- Your payment history – to see if you have paid your bills on time
- Your current debt – to see if you are able to reasonably take on more debt
- Whether you have had any collection accounts
- Any public records, such as bankruptcies, judgments and liens
- The types of financing you have successfully managed
- The length of your credit history
- Recent activity, including new accounts and credit inquiries by other lenders
Based on this information, a lender will decide whether to approve or decline your credit application. If they approve it, they will set your credit terms, such as interest rate, credit limit and down payment requirement.
