Applying for a Loan?--Start by Ordering
Your Credit Report
If you are considering applying for a loan,
ordering a copy of your credit report may well be the best place
to start. Why? Because it’s also the first thing a potential
creditor will be looking at, and even if you pay your bills on
time, you will want to ensure that all the information in your
credit file is up-to-date and accurate.
Studies have shown that many credit files
contain inaccuracies that could affect your credit rating, and
even lead to the rejection of a loan application. That’s why
reviewing your credit report beforehand may be a good idea, giving
you time to dispute any items that may be the result of simple
human error or a technical glitch.
And depending on whether you are applying for an
auto loan, a mortgage loan, or a loan for business or personal
use, different lenders may apply different standards in rating
your credit worthiness. For this reason, reading your credit
report and understanding how your credit data might be interpreted
may give you a chance to improve your credit worthiness from the
point of view of a lender.
Before you begin the application process, check
your credit report for the following items:
Sometimes credit reports contain inaccuracies
that are the result of a computer glitch or a clerical error.
These may include payments not credited, late payments, or data
mixed in from a credit file of someone with a name similar to
yours. Ordering your credit report will quickly show you what the
lender will see--then it’s up to you to dispute any information
that you consider inaccurate.
Excess Unused Credit
To make your credit more attractive to a
potential lender, you may wish to consider reducing the number of
revolving charge accounts that are listed as active on your credit
report. Lenders will sometimes view too much revolving debt as a
negative when considering a loan application.
In situations where you have stopped using a
credit account, it is often a good idea to close the account if
you don’t plan to use it anymore. Make sure your creditor notates
the account “closed at consumer’s request”--otherwise, a
prospective lender might assume the creditor closed the account
for other reasons.
A few credit cards managed well may improve your
chances for a loan--particularly a mortgage loan, where lenders
use stricter qualifying guidelines. Another rule of thumb is to
keep balances on credit cards around 75% of the available credit
limit. Ironically, credit cards that have lots of room on them may
be viewed as potential debt, while maxed-out cards make you a less
desirable credit risk--both of these situations could compromise
your ability to obtain a loan.
30-day and 60-day Late Payments
Even if your credit report contains a couple of
30-day late payment entries that are accurate, many lenders will
overlook the occasional late payment if you explain the situation
and your credit is otherwise good. Try to avoid any payment being
60 days late however, as this may be a red flag for some
lenders--even if they do grant you the loan, it may come at a
higher rate of interest and with less favorable terms.
The primary period lenders are interested in on
a credit report is the last two years, so try to maintain on time
payments, and verify that the payments are being credited properly
by checking your credit report regularly.
Avoid Unnecessary Inquiries
Each time a prospective creditor looks at your
credit report, an inquiry notation is added to your file, and most
inquiries stay on your credit report for up to two years.
Inquiries you make yourself, inquiries made during screening for a
pre-approved offer of credit, or an inquiry that is part of a
background check for employment purposes are not reported to
potential credit grantors.)
It is best to avoid over-applying for credit and
running up excessive inquiries, for the simple reason that lenders
of creditors may think you’re trying to get credit due to
financial difficulty, or taking on more debt than you can repay.
Lenders do of course realize that some inquiries
are a result of shopping around for the best rates on a loan, and
so they will often overlook a block of inquiries within a very
recent period. It may help if you explain the inquiries in the
Understanding how your credit report affects
your financial future is the key to smart credit management.
Incorporating a review of your credit report into your financial
planning is also one of the best ways to make sure you meet your
goals--especially when those goals involve major purchases, and
you’re shopping for a loan with the most favorable terms possible.