Credit Scores Aren’t The Only Factor that Lenders Consider
If you have decided to apply for a new credit card, auto loan or mortgage — and if you are a regular reader of our blogs and you have been working to improve your credit profile — you could not be blamed for feeling confident. You have a firm grip on your finances and your credit score has never been higher. The approval process should be a cinch.
And then you are denied.
But why? The answer is that, while your credit score is incredibly important, in some ways, it’s only the price of admission. A good score will get you in the proverbial door, but other factors will be weighed to decide whether you are a good candidate for the particular form of credit you are seeking.
Here are three factors that can play a critical role in determining whether or not you are approved for new credit.
1. Your Income
To be clear, your credit score doesn’t know or care how much money you make in a given week, month or year. Someone making $25,000 a year can have the exact same score as someone making $250,000.
When you apply for a credit card, auto loan or home loan, your income suddenly becomes very important. Each bank or finance company will ask you to prove your income (typically by providing tax returns or pay stubs), and that, in turn, is used to determine whether you are worth the risk. For example, someone making $25,000 a year might have a hard time getting approved for $10,000 in new credit, whereas someone making $250,000 a year likely won’t have any trouble securing that amount.
It’s important to note that the system is weighted toward traditional forms of employment. If you are a freelancer, or you have irregular sources of income, it will be harder to prove that you are a good candidate for some loans. Be prepared: Keep meticulous records about where your income comes from, and have as much documentation as possible to prove you have the ability to repay.
2. Your Debt-To-Income Ratio
Speaking of income, finance sources also will compare your income levels to the amount of debt you already have to make sure you are capable of taking on another payment.
For example, if you make $5,000 a month, but you already have $3,000 in monthly payments accounted for, it might be hard to convince the bank to give you another monthly obligation. Their goal is to make sure you can fulfill all your financial obligations, and not worry that you will get in over your head and start defaulting on payments — even if you have never missed one.
In general, banks are looking for a ratio of 36% or lower. If you already have a lot of payments or debts, whether or not you can afford them, it might be a good idea to pay a few off before trying to apply for a loan or credit card.
3. You Are A “Gamer”
Do you live for the signing bonuses offered by credit card companies? Are you always on the lookout for deals that offer you miles, points or other types of incentives to move your balance? Then you might have an increasingly difficult time getting approved for new credit.
Banks and other financial institutions are getting increasingly sophisticated in their tracking abilities. In particular, they are getting better at spotting patterns of “credit card gaming.” At the end of the day, they are loaning you money because it is profitable for them, not because they are just nice people. If they think you are likely to jump ship as soon as the introductory offer expires, they are going to be more likely to deny your application, regardless of your credit score.
If your creditworthiness is still a work in progress, consider an auto loan refinance. Refinancing can reduce your interest rate, lower the total cost of your vehicle, or allow you to pay your loan off faster. Learn how car loan refinancing works or apply to refinance your car loan now.