5 Factors That Can Make Your Credit Report a Lender’s Nightmare
Applying for a credit card, payment plan, or loan of any kind can be a scary process. The paperwork to apply for the loan is long and complicated. Worse still you have to wait and worry about whether they’ll approve the loan.
Keeping your credit report clean is the easiest way to make applying for a loan easier. Make sure you avoid these red flags on your credit report.
People with no or poor credit often need a cosigner to get a loan. A cosigner functions as a reference for the trustworthiness of the borrower. Cosigning is a statement of “this person is so trustworthy that I will pay if they don’t.” This means that if you cosign for a loan you are responsible for it.
This can scare lenders because it increases your debt to income ratio. A big debt to income ratio means a smaller chance you can afford all your loans. Not cosigning can keep your ratio low, increasing your odds of getting a loan.
Credit inquiries on your report is another measure of your ability to pay a loan. Each time you apply for a credit card or a loan, an inquiry is placed on your report. These inquiries fall off your report after two years.
A lender’s main concern is your ability to pay them back. Applying for more than one loan in a short period is a red flag. It shows that you are in desperate need of cash, or that you want a loan that is too large.
Don’t let this stop you from shopping for the best rates on big loans. Fair Isaac Corporation (FICO), the group that tracks your credit score accounts for this. Student, mortgage, and auto loan credit checks have a shopping period built in.
Bankruptcy has become more common since the housing market crash. Lenders have compensated for this and sometimes make loans to people with previous bankruptcies. One major red flag that remains is an undischarged bankruptcy.
When filing for bankruptcy, the filer will list all the loans they are unable to pay. Once the court hearings have concluded a judge will determine which loans to discharge. The recipient of the loans is no longer obligated to pay once this occurs.
Undischarged bankruptcies are a red flag for lenders because they are amendable. Even loans extended after the bankruptcy filing are eligible for discharging. Discharging of the loans can take months or years depending on the type of bankruptcy.
Short sales are another practice that became common during the housing crash. A short sale is often used as a way to avoid foreclosure on a home. A short sale is when a mortgaged home is sold for less than the full amount due on the loan.
This shows up as a major red flag on your credit report. It often appears as a “charged off” loan or as “settled for less than the full amount due.” To a lender, all this means is that you were unable to pay a loan and are more likely to not pay a new loan. Short selling a home gives you more control, but to a lender it looks as bad as a foreclosure.
Outstanding Credit Card Balances
Carrying a credit card balance can be tempting but damaging to your finances. Your credit report only shows your current credit limit and your current credit debt. What it does not show is whether you are paying in full monthly, or only paying the minimum.
This makes outstanding credit balances a red flag to lenders. The higher the balance compared to your limit, the bigger the flag. Your credit utilization ratio is a measure of how much of your credit limit you are using. It makes up a significant part of your credit score so keeping it low is important.
It is important to note that this can be high even if you pay in full every month. If you make large purchases on your cards your report will show high utilization. If you are applying for a large loan, you may want to avoid using your cards. This will keep the ratio low and your credit report looking good.
The Bottom Line
Keeping track for your credit report can be a difficult thing to manage. Making sure to avoid the major red flags is a good first step when applying for a loan.