How Lenders Determine Your
Creditworthiness
By Jeanette Joy Fisher
Millions of Americans find
themselves in a credit bind. For a variety of
reasons, they can't obtain credit while they try
to rebuild a crippled credit rating. Here are some
things that lenders look at, and some suggestions
for how you can make yourself appear more
creditworthy to potential creditors.
Although many people think that the best way to
begin rebuilding credit is to apply for many new
credit cards, that practice may actually hurt your
chances. The reason is that credit card companies
may assume that since you've applied for many
cards, you may have been issued a number of them,
which could mean a potentially higher debt load in
the future. On the other hand, they might look at
the fact that many of the cards weren't issued,
which could mean the other companies didn't trust
you to make your payments. Either way, you lose,
so be selective in applying for cards, and space
out your requests rather than making a bunch of
them in a short time.
Of course, creditors also look at the types of
black marks that show up in your credit history.
From best to worst, the things that will hurt you
most are: payments that were late by 90 days, IRS
liens, court judgments, accounts that were turned
over to collection agencies, accounts that were
charged off as uncollectible, repossessed goods or
merchandise, real estate foreclosures, and
bankruptcies.
Creditors such as banks also look favorably at
things like having a savings and/or a checking
account with their institution, having a telephone
in your own name, whether or not you own your
home, and how long you've been at your current
address. They're looking for stability before
extending credit.
They'll also calculate your present debt ratio to
see if you can take on more debt. They'll
generally add up all your monthly bills (not
including rent/mortgage or utilities) and divide
that number by your gross monthly income. If your
ratio is more than 35%, they probably won't extend
you credit. You can help lower that figure by
consolidating your debts, which will lower your
monthly payment and decrease your debt ratio,
which will give you a better chance to qualify for
credit, even though it won't reduce your actual
overall indebtedness.
If you're turned down for credit, you have the
right to know why. The law says that creditors
must provide specific reasons and the name and
address of the credit bureau they used to make
their decision. If the reasons your rejection
doesn’t sound right, obtain a copy of your credit
report from the bureau that the creditor used and
check it for errors. You have the right to request
a free copy of the report that caused you to be
rejected. If you find errors, there are ways you
can have them changed. Then contact the creditor
again and explain the error. You just might be
extended credit the next time.
Remember, lenders are in business to make a
profit, so they must screen all potential
borrowers carefully. However, once you know what
they look for, you can make an effort to address
those things in order to make yourself appear more
creditworthy.
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Copyright © 2006 Jeanette J. Fisher
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