Applying for a Loan?--Start by Ordering Your Credit Report
If you are considering applying for a loan, ordering a copy of your credit report may well be the best place to start. Why? Because it’s also the first thing a potential creditor will be looking at, and even if you pay your bills on time, you will want to ensure that all the information in your credit file is up-to-date and accurate.
Studies have shown that many credit files contain inaccuracies that could affect your credit rating, and even lead to the rejection of a loan application. That’s why reviewing your credit report beforehand may be a good idea, giving you time to dispute any items that may be the result of simple human error or a technical glitch.
And depending on whether you are applying for an auto loan, a mortgage loan, or a loan for business or personal use, different lenders may apply different standards in rating your credit worthiness. For this reason, reading your credit report and understanding how your credit data might be interpreted may give you a chance to improve your credit worthiness from the point of view of a lender.
Before you begin the application process, check your credit report for the following items:
Clerical Inaccuracies
Sometimes credit reports contain inaccuracies that are the result of a computer glitch or a clerical error. These may include payments not credited, late payments, or data mixed in from a credit file of someone with a name similar to yours. Ordering your credit report will quickly show you what the lender will see--then it’s up to you to dispute any information that you consider inaccurate.
Excess Unused Credit
To make your credit more attractive to a potential lender, you may wish to consider reducing the number of revolving charge accounts that are listed as active on your credit report. Lenders will sometimes view too much revolving debt as a negative when considering a loan application.
In situations where you have stopped using a credit account, it is often a good idea to close the account if you don’t plan to use it anymore. Make sure your creditor notates the account “closed at consumer’s request”--otherwise, a prospective lender might assume the creditor closed the account for other reasons.
A few credit cards managed well may improve your chances for a loan--particularly a mortgage loan, where lenders use stricter qualifying guidelines. Another rule of thumb is to keep balances on credit cards around 75% of the available credit limit. Ironically, credit cards that have lots of room on them may be viewed as potential debt, while maxed-out cards make you a less desirable credit risk--both of these situations could compromise your ability to obtain a loan.
30-day and 60-day Late Payments
Even if your credit report contains a couple of 30-day late payment entries that are accurate, many lenders will overlook the occasional late payment if you explain the situation and your credit is otherwise good. Try to avoid any payment being 60 days late however, as this may be a red flag for some lenders--even if they do grant you the loan, it may come at a higher rate of interest and with less favorable terms.
The primary period lenders are interested in on a credit report is the last two years, so try to maintain on time payments, and verify that the payments are being credited properly by checking your credit report regularly.
Avoid Unnecessary Inquiries
Each time a prospective creditor looks at your credit report, an inquiry notation is added to your file, and most inquiries stay on your credit report for up to two years. Inquiries you make yourself, inquiries made during screening for a pre-approved offer of credit, or an inquiry that is part of a background check for employment purposes are not reported to potential credit grantors.)
It is best to avoid over-applying for credit and running up excessive inquiries, for the simple reason that lenders of creditors may think you’re trying to get credit due to financial difficulty, or taking on more debt than you can repay.
Lenders do of course realize that some inquiries are a result of shopping around for the best rates on a loan, and so they will often overlook a block of inquiries within a very recent period. It may help if you explain the inquiries in the application process.
Understanding how your credit report affects your financial future is the key to smart credit management. Incorporating a review of your credit report into your financial planning is also one of the best ways to make sure you meet your goals--especially when those goals involve major purchases, and you’re shopping for a loan with the most favorable terms possible. Learn More.
