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Ever wonder why the bank turned you down for a loan you were sure to get? What did the underwriters see that made them reject your application? Having a good credit score and source of income are certainly needed for most loan opportunities, but those aren't the only factors your lenders look at. They analyze your credit report from top to bottom, and you might be surprised by what they focus on.
Before you get disgruntled, discouraged, or disgusted by your next loan rejection, you may want to dive further into how lenders analyze your credit report. What do banks look for in loan applications? What makes a good credit report for a loan? All of these questions and more will be answered shortly.
Your credit score is essentially the first impression that lenders get of your overall credit. It is a reflection of what is inside your credit report. This is far from the only factor involved, but it is certainly one of the more substantial ones. The higher the credit score, the better impression you leave.
To put this into a real world perspective, think about what happens when you meet a new person. The smile the person gives you determines a lot about what you think of him or her. Consciously or not, you instantly judge the person's health, hygiene, and way of life from that first glimmer of teeth. Your credit score is your smile.
Some lenders and credit card issuers have programs in place to automatically decline applicants with scores lower than a set amount. At one of my local banks, they will not take applicants of any kind with credit scores below 700. That means you have to have at least a 700 credit score to get a house loan, car loan, or anything else from that bank. To apply for an SBA loan (government loan from the Small Business Association), you need a minimum score of 640. If you make it past this first hurdle with your lender, your credit will go through deeper analysis.
Your credit history is the primary factor in your credit report. This details which loans you have had in the past and how well you have paid those off. Ideally, your credit report will show a long history of positive payments to multiple creditors and lenders. This variety will help you get approved for a loan.
The main reason lenders look over your credit history is because they want to get a better feel for why your credit score is as high or low as it is. Let's say, for example, that you're a 30 year old with a score of 720. Chances are you don't have a ton of payments on your credit report yet because you haven't been building credit long. The lender may not grant you as high of a loan as you want because of that. You haven't "proven yourself" enough, so to speak.
On the flip side of that, a lender may also look over the bad credit that you have acquired to determine if it's really your fault. If you made great payments up until a car accident or a loss of work, the lender may factor that into your application. If the sole source of your bad credit is medical bills, they may overlook your low score because they expect you to have those. Your credit history can give you a chance to redeem yourself if you made a bad impression with a low score. That is why it is important to keep it as clean as possible.
The lender will also look over your credit inquiries to see how many loans you have applied for recently. If you have been applying for every loan imaginable for the past month or two, the lender may assume you are desperate to get money. That's not a good sign. Excessive inquiries can have a negative impact on your credit score, and they can send huge red flags to potential loan providers. Thus you need to limit your applications to those with the most promise.
To put this into perspective again, think about what happens when you first start dating another person. If you find out that he has had 12 girlfriends in the past 10 months, you're going to be a little leery about his ability to commit. This will be even worse if you find out he has had 4 wives in the past 5 years. The lender will assess your credit report in the same way you assess a potential mate. A loan is just as much of a commitment as a relationship.
The final factor in your credit report analysis will usually be in the types of accounts you've had, including their values. Let's assume you want to buy a car that costs $40,000 and you have the income to support the payments. If your highest car loan in the past was $15,000, the lender may not be willing to give you that much of a chance. You may qualify for a $25,000 car, but it will be a bit before you can work your way up to something more expensive.
Let's put this into perspective one more time. Pretend that you are a hiring manager for a hospital looking for a new nurse to lead the cancer ward. Do you hire the one fresh out of college who has a fitting degree or the one who has worked with cancer patients for over 10 years? Even though the first person is qualified on paper, she does not have enough real-world experience yet. You have to show that you have experience making similar payments on similar accounts before a lender will turn money over to you.
How to Find out Why Your Application Was Rejected
After all of this information, you may still not know the reason why your loan application was declined. You could try calling the lender to find out this information, but they may or may not give that out over the phone. If you cannot gain any insight with a phone call, wait for a letter to come in the mail. The company has to send you something about the rejection no matter what. In that letter, you will see a bullet list of reasons why your application was declined. It will usually arrive within 10 business days. Once you understand this, you can make adjustments to your spending habits that will make positive changes on your credit report for the future.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.
*The content in this article is accurate at the publishing date, and may be subject to changes per the card issuer.