Creditworthiness: What Lenders Look at Besides Your Score

Your credit score is the first thing most lenders check, but it’s rarely the only thing. A lender also wants to know whether you can afford the new payment, how stable your income is, and what’s at stake if things go wrong. Two people with the same 720 score can get very different answers on the same loan.

The score: your track record

The score summarizes your credit report: whether you pay on time, how much of your available credit you’re using, how long you’ve had credit, and how often you apply for more. Lenders use it to sort applicants into pricing tiers, so a higher score usually means a lower rate. Understanding Credit Score covers how it’s calculated.

Many lenders also look past the number at the report itself. A score of 680 from one late payment five years ago reads differently from a 680 driven by a recent collection.

Debt-to-income ratio: can you afford it?

This is the big one the score doesn’t capture. Your debt-to-income ratio (DTI) is your total monthly debt payments divided by your gross monthly income.

Example: you earn $5,000 a month before taxes. You pay $1,400 in rent or mortgage, $350 for a car, and $150 in card minimums, so $1,900 in total. Your DTI is 38%. A new $300 loan payment would push it to 44%.

Each lender sets its own limits, and they vary by loan type, so ask what DTI the lender wants to see. The fastest ways to lower DTI are paying off a small debt completely, which removes a whole monthly payment, or adding a co-applicant’s income.

Income and employment: will it last?

Lenders want to see income that’s stable and likely to continue. Expect to show pay stubs, W-2s, or tax returns. If you’re self-employed, expect to show two years of returns. A recent job change within the same field usually isn’t a problem; a gap in employment or a switch to commission pay may require more explanation.

If your income is irregular, apply when you can show a strong, documented history, and have your bank statements ready.

Savings and assets: what’s the cushion?

Money in the bank tells a lender you can keep paying through a rough patch. For mortgages, lenders often check that you have enough left over for a few months of payments after closing. Even for smaller loans, a healthy savings balance can tip a borderline application.

Collateral and co-signers: what backs the loan?

A secured loan, backed by a car, a home, or a deposit, is less risky for the lender, so approval is easier and rates are lower. A co-signer with strong credit can also help you get approved, but they’re fully on the hook if you don’t pay. That’s a big thing to ask of someone.

If you’re turned down

When a lender denies your application, it has to tell you why, either in the notice or if you ask within 60 days. “You didn’t meet our standards” isn’t specific enough; “income too low” or “too many recent inquiries” is. If a credit report was part of the decision, the notice will name the credit bureau, and you can get a free copy of that report.

Use the reasons as a to-do list:

• Score too low or too many late payments: see How to Raise Your Credit Score.
• High utilization: pay card balances down before reapplying.
• DTI too high: pay off a small debt or apply for a smaller amount.
• Not enough history: consider a secured card or credit-builder loan first.
• An error on your report: dispute it; see How to Dispute a Credit Report Error.

Lenders are also legally barred from discriminating based on race, religion, national origin, sex, marital status, age, or receiving public assistance. If you suspect that happened, you can report it to the FTC.

Before you apply

Check your own report, calculate your DTI, gather income documents, and use prequalification tools where possible, since they usually involve only a soft inquiry. Walking in knowing your numbers puts you in a much better position to compare offers.

Sources

• FTC: Credit scores
• FTC: Credit discrimination is illegal
• Experian: Personal loan requirements to know before you apply
• myFICO: What’s in your credit score

This article is for educational purposes and is not financial advice.