If you're in the market for a new loan or credit card, it's important to know what lenders consider when reviewing your application. Here are some of the common factors that can affect your creditworthiness:
The easiest way to define credit history is how long you've had credit and how well you've handled it. The longer you've had credit, the better. Lenders also look for a consistent history of paying your bills on time. A pattern of late or missed payments makes you less creditworthy in most lenders' eyes. While some may still offer you a loan or credit card, your interest rate could be higher than a person with a better credit history.
Available credit vs. how much you're using
Although you’re applying for a new loan or credit account, the amount of available credit you have now can determine your creditworthiness. If you have several credit cards with high limits, a lender may consider you less creditworthy because you could use that credit and then have difficulty making payments on a new loan or credit account. Lenders are also wary if your balance is close to your credit limit. Some experts suggest using no more than 30% of the credit available on each card.
Monthly income vs. monthly expenses
Some lenders compare how much you earn each month with your living expenses and debts, such as rent or mortgage, utilities and other loan payments. How much money you have left after paying these bills helps them decide if you have enough income to take on more debt. Many lenders look for a debt ratio (how much you earn compared to how much you owe) of less than 40%. For some types of loans, you may need to provide proof of income, such as pay stubs or tax W-2 forms.
What types of credit you have
Lenders like to see that you can handle different types of credit, such as mortgages, car loans, credit cards and personal loans. This shows you can be responsible with any form of credit.
Number of recent credit applications
Certain lenders see applying for several new credit cards at once as a sign that you may be in financial trouble. However, some lenders know that multiple applications for a car loan within a short period of time mean you’re shopping for the best rate, not buying multiple cars. As long as the inquiries were all made within a certain period of time, usually 14 days, most credit scoring models count them as one. Some inquiries don’t count against your score, either. To learn more, check out the difference between a hard and soft inquiry.
In some cases, a lender will allow you to use property you own, such as a car or home, to secure a loan. It's important to remember, however, that if you use collateral to get a loan, and you don’t make your required payments the lender can take your home or car as payment on the loan.
Make yourself worthy
Not all lenders rate creditworthiness the same, but it could help to score well in each of these factors. If you feel confident about your credit — great job and keep it up! If you're not up to par in any of these areas, try these tips to get smart about credit and improve your credit score.
[*updated October 15, 2018]