If you’re like most people, when you are considering a landmark purchase like a new home, car or even a business, it is necessary to think first about taking out a loan. Applying for a loan can be confusing, especially if it is your first time. Knowing the factors that lenders take into account when considering your loan will help you understand and be better prepared to have your ducks in a row before turning in your application. Let’s take a closer look.
Your mission when applying for a loan is to improve your FICO or credit score, which ranges from 300-850, as much as possible. The higher your credit score, the more likely it is that your loan application will be accepted and that you’ll get a better interest rate when you start paying it back. Finding out your credit score is as simple as requesting a credit report from your bank, or by using an online service, but be cautious when searching online as there are quite a few scam sites out there promising free credit reports but delivering only spyware.
There are about 30 individual metrics that influence your credit score, but most of these fall into five basic categories. The most important of these factors is payment history, which is a summary of previous loans and payments. Payment history is negatively affected by late payments on credit cards and other bills, missing payments, and, of course, bankruptcy. Your payment history accounts for about 35% of your FICO score.
Debt is another big factor that makes up 30% of your credit score. Outstanding debt shows lenders that others are also waiting on your payments. The fewer outstanding debts you have, the better your chances of securing a new loan. Paying off some of your debt before applying for a loan or checking your credit score can have a very beneficial effect on your loan outcome.
Credit history is another major consideration, accounting for 15% of your credit score. Unlike debt, your credit history is a cumulative measure of how much credit you have taken out in the past. The more extensive your credit history, the more likely you are to have your application accepted. If you have no credit history, it might be time to start building it up through credit cards and smaller, less risky loans.
Applying for new credit too often can hurt your chances of getting credit and affects about 10% of your overall credit score. It’s not good to appear frivolous in your dealings with lenders, and applying for too many loans or credit cards will hurt your chances. The final 10% of your credit score is determined by the types of credit you currently use. The more outgoing payments you have on your books, the less likely you are to be approved for a loan.
Learn more about loans in person at United Bank. Our experts will talk you through your credit score, help you secure a loan, or offer advice for building your credit for the future. Before you make a big decision, get a second opinion from your local United Bank, an equal housing lender.