What Lenders Look at on Your Credit Report
"It’s a simple question with a complicated answer, as there are no universal standards by which every lender judges potential borrowers."
More than anything else, lenders want to get paid. Accordingly, a potential borrower’s track record of making on-time payments is of particular importance. In fact, in calculating a potential borrower’s FICO score, payment history is the most important factor. It accounts for 35% of the score. Nobody is excited about loaning money to someone who has demonstrated a less-than-stellar commitment to repaying their debts.
Late payments, missed payments, mortgage default, and bankruptcy are all red flags to lenders, as is having an account referred to a collection agency for lack of payment. While a few blemishes on your payment history may not stop lenders from giving you money, you are likely to get approved for a smaller amount of money than you might have otherwise qualified for, and you are likely to be charged a higher rate of interest.
Large amounts of outstanding debt are another significant concern to lenders. It’s a bit of a paradox, but the less debt you have, the greater your chances of getting credit. The principle here is similar to that involving payment history. If you have a large amount of existing debt, the odds that you will be able to pay it back decrease. Outstanding debt accounts for 30% of your FICO score calculation.
Having an established credit history is good for your credit rating. Opening a bunch of new credit cards in a short amount of time is not. When you suddenly open multiple credit cards, potential lenders can’t help but wonder why you need so much credit. They will also have questions about your ability to repay the debt should you suddenly choose to max out all those cards. New credit accounts for 10% of your FICO score. If you need a good credit score, take a pass on opening a new credit card account just to get that free travel mug or umbrella.
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