As you might imagine, most credit applications are declined due to the consumer’s credit score failing to meet the lender’s minimum requirement. Many lenders look only for applicants with above average credit scores as they have displayed a history of re-paying their debt. These consumers present a more manageable risk to the lender and these consumers find it much easier to secure financing when needed and also enjoy lower interest rates. Generally speaking, the better the credit, the better the terms that the consumer will qualify for.
But did you know that credit score is just the starting point in determining if a consumer is approved for a loan? If the consumer’s credit score meets the minimum requirement, the lender then moves on to other qualifiers prior to approving the loan. Most importantly, does the consumer have enough disposable income after paying all their current obligations to service the additional debt and comfortably make the additional monthly payment? Lenders review the relationship of the income of the applicant and the debt they currently service to develop a debt to income ratio, which becomes critical in lending decisions.
To further complicate the lending process, each lender develops a “scorecard” of characteristics they are looking for or hoping to avoid. These scorecards all contain a minimum credit score and also an acceptable debt to income ratio. In addition, if you are applying for an unsecured loan where there is no collateralization, lenders may look specifically at your performance in this area and weight that performance more heavily. For example, if you are applying for a loan for an elective medical procedure, which is unsecured, they may look very closely at your payment history relative to other unsecured debt, such as your credit cards. They may also look for past medical bills that have gone to collections. Lenders will certainly look at your payment performance on loans or credit you have established in similar areas that you are now requesting a loan for.