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Looking for a Personal Loan? Learn How Creditors Check Your Financial Health Beyond Credit Scores
Your three-digit credit score isn’t the only factor in being approved for a loan – there’s more to the credit approval story than that.
Thanks to good financial education, Americans know that a good credit score equals good credit health.
That said, credit scores aren’t everything. In fact, they’re only three numbers out of a menu of criteria lenders use to make credit decisions. In fact, creditors also use other criteria to make decisions that impact financial consumers.
That’s important when taking out a personal loan or other forms of credit. Let’s take a closer look what consumers should know, beyond credit scores, that can swing credit and lending decisions in their favor.
Beyond Credit Scores
When lenders weigh a personal loan request from a financial consumer, they do factor in credit scores – but they look at other personal financial risk factors, as well.
“According to a Consumer Finance Protection Bureau study, one in 10 American consumers actually has no credit history,” said Baruch Silverman, founder of InfoForInvestors.com, an online money management platform. “So, while credit score is an important factor when lenders make a credit decision, they also need to consider other factors, which can differ between different borrowers.”
According to Silverman, credit risk factors that might apply on a personal loan are abundant.
“These factors may include pay stubs, tax reports, checking your debt to income ratio, or requiring additional information about your assets,” he said. “If the lender is still unsure, they may ask for collateral. This is something of value that can be used as security for the loan. Should you default on a personal loan, the lender may seize the property to offset against the outstanding debt.”
That’s not all. Creditors may dig even deeper to get a good sense of a borrower’s financial health and habits – likely more than the borrower even knows.
“For instance, a lender want to know if a borrower’s income isn’t high enough or it’s irregular,” said Jay Warra, founder of Walletero.com, a personal financial website. “Certain credit offers, like premium credit card programs (think gold and platinum cards), may require minimum income levels. You may have an excellent credit score, but if you don’t meet the higher income standard, you won’t qualify.”
Having limited credit experience could factor into a lending decision, as well.
“Lenders’ credit policies are forward-looking in nature,” Warra said. “They try to anticipate your future risk of default. Some lenders may reject your application if you don’t meet their minimum credit experience.”
Improving Your Credit Health
Job one for anyone looking for a personal loan or other form of credit is take a look at the big picture and do all they can to bolster their financial profile to lenders. Take these action steps to improve your overall credit health.
Pay more than your minimum payment due. Payment history is the most overlooked credit risk factor that lenders consider. “The amount you pay on your revolving accounts contains payment behavior used by lenders,” Warra said. “It tells them whether you may be able to handle additional credit. Thus, paying on time is absolutely important. But it’s also important that you pay more than your minimum on your credit cards.”
Take a holistic look at your financial profile. If you want to improve your credit health, look at your financial health holistically. “There are some basic steps everyone can take to build a solid financial health foundation,” says Lauren Bringle Jackson, an accredited financial counselor with Self Financial, a financial technology company. “First, get clear on your financial goals. Do you want to save money? Pay down debt? Work towards buying a home? Setting goals helps you create an action plan and find the right resources to achieve them.
“Next, review your spending and create a budget so you can put your money towards your goals and values, rather than indulge any impulses,” Jackson said.
Keep personal debt low. In order to obtain credit, a lender needs to trust your ability to repay your personal loan.
“In addition to assets, the amount of debt compared to income should be reasonable, preferably 30% or less,” Silverman says. “If the ratio is higher, you’ll have greater difficulty in repaying the loan despite a great credit score. Therefore, keeping your debt to income ratio as low as possible and ensuring the total DTI after the loan remains at less than 30%.”
Taking the Big Picture With Personal Loans and Credit Health
As Silverman said, lenders need to trust the ability to repay any personal loans. More importantly, the lender needs to ensure that if you fail to repay, they will still get their money back.
“Therefore, the most overlooked non-credit score factor has to be your total financial assets,” Silverman noted. “Any asset, even if it is not needed or collateral or even liquid, can improve your credit prospects in the eyes of a lender. This can be a real estate property, an emergency fund, savings or investment account, or even a life insurance policy with sufficient accumulated cash value will suffice.”
Basically, the more information you can give a lender – even information on financial assets that goes beyond credit scores – can give you a big leg up when applying for a personal loan.
Brian O'Connell has been a finance writer at TheStreet, TheBalance, LendingTree, CBS, CNBC, WSJ, US News and others, where he shares his expertise in personal finance, credit and debt. A published author and former trader, his byline has appeared in dozens of top-tier national publications.