When you apply for a loan or a credit card, your lender will obtain information about your finances and credit to determine if you qualify to borrow money. Each lender uses this information differently to assess you as a potential borrower depending on the lender's guidelines. However, lenders typically obtain and use three primary types of information to determine your creditworthiness.
Payment History
Lenders typically use payment history, which they obtain from your consumer credit reports, as a means to evaluate your creditworthiness. Your credit reports show delinquent payments on installment loans, mortgages, credit cards and lines of credit. Late payments on existing accounts show inability to handle debt, and may cause a prospective lender to deny a loan or credit card.
Length of Credit History
Length of credit history refers to the period of time during which you have maintained active credit accounts with lenders. A long credit history, coupled with an absence of delinquent payments, can help establish creditworthiness to qualify you for credit cards and loans. Conversely, if you have no established credit history, a potential lender has little information to evaluate your creditworthiness. Some lenders may decline your credit application if you do not have an established credit history.
Debt-to-Income Ratio
Even if you have a solid credit history with no missed payments, your debt-to-income ratio can affect your creditworthiness. A potential lender will look at your existing credit balances and monthly payments, and will compare this information to income information you or your employer supply. The larger the portion of your income you must pay toward existing debts each month, the less likely a lender will be to approve a loan. The lender may reason that an additional credit obligation may strain your finances and make you unable to afford your loan payments.
Other Information
A lender may use other types of information when evaluating your creditworthiness for a loan or credit card. This information may include vehicle repossessions, rental payments and public records such as bankruptcies, judgments, property liens and foreclosures. With the exception of rental payments, these factors can decrease your credit score, potentially affecting your ability to obtain credit. Lenders may also look at expenses such as utilities, groceries, entertainment and child care when determining your creditworthiness.
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