When borrowing money from a lender, whether it is a mortgage, a consumer loan or a revolving product like a credit card, you will be asked to provide substantial information to the lender about your credit history, your current income and your current debts. Much of this information will come directly from your credit report but you may be asked for other information about your income and expenses.
The Lending Process
Every lender has different specific criteria and requirements of its borrowers, but all have the same goal -- to make certain that they will get back all of the money they have loaned you plus all of the interest. For this, lenders gather as much information as they can about you, your spending habits and your ability to manage credit. It is unlikely that you will be asked specific information about your credit card spending, but you may be asked for your income and your major expenses, such as existing loan payments and housing costs. You may have to prove your income by showing a pay stub or personal financial statement. Whether the lender will approve the loan and what rate you pay is dependent upon its investigation of your credit-worthiness.
Your Credit Report
Most of the information about you and your finances will come to the lender through your credit report. One of the documents that you must sign to apply for a loan authorizes the lender to check your credit report. In this report, your credit history for the past seven or more years is displayed, including outstanding debt, history of late payments and any negative financial issues such as foreclosure or bankruptcy. Most lenders rely heavily on a potential borrower's credit report when making the lending decision.
Your History With the Lender
If you are borrowing from a lender with which you already have a credit history, the lender has more access to the details of that history than it would if you had never dealt with it before. If you have been consistently late on payments -- even if you are not late enough for it to be reported on a credit report -- the lender will see that and it may impact the rate you are charged for the new loan. On the other hand, if you have a stellar borrowing and payment history with the lender, it can favorably impact the new loan.
Improving Your Chances
The first step in applying for credit should always be obtaining a copy of your credit report. You need to know what is on it before a potential lender sees it. If there are any errors, you can have them corrected. Your credit report will also give you an idea as to how a lender will interpret your credit-worthiness. For example, if you had a period of time when you were late with several payments for a legitimate reason, such as illness, you can explain that to the lender.
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