You are not your credit score. It’s true that banks and other businesses place a lot of emphasis on your three-digit score when they’re deciding whether or not to take you on as a customer, but that’s not all they consider.
Your credit score doesn’t tell the whole story–it only predicts the likelihood that you will pay your bills based on how you’ve paid in the past. And as evidenced by the mortgage meltdown, placing more emphasis on credit scores than ability to repay is bad for everyone involved.
Besides, credit scores evaluate whether you’re likely to pay your bills, not whether you can pay them. Instead, banks look at additional factors to decide the latter.
Debt-to-Income Ratio
How much money you bring in each month is a key factor in deciding whether your application should be approved. Credit card issuers are now required to ask for your personal income and only give out credit cards to people with sufficient income to pay back their credit card balance.
Not only do lenders look at your income, they also compare your income to your monthly debt payments by calculating your debt-to-income ratio (monthly debt divided by monthly income). A lower debt-to-income ratio is better because it indicates you’re not spending much of your earnings on debt repayment.
Related>> What on Earth Doesn’t Affect My Credit Score?
Last Two Years of Payments are Crucial
How you’ve paid your bills in the past two years matters much more than what you did five or six years ago.
Banks hone in on your most recent payment history to decide whether to approve you. If you’ve paid on time in the past 24 months, you can be approved despite old collection accounts that may appear on your credit report.
On the other hand, recent delinquencies can hurt your chances of getting approved, even if you’d always paid on time before.
Job Stability
Your employment status isn’t a factor in your credit score, despite the fact that your current employer may be listed on your credit report. However, the status of your job and length of time you’ve been employed are important factors in your approval.
The longer you’ve been at your current job, the better your chances at getting approved. On the other hand, if you’re new on the job or you’ve had inconsistent employment, you’ll have to be stronger in other areas to get approved.
A Bigger Down Payment Makes You More Attractive
Major loans, like a mortgage or auto loan, require a down payment. You can improve your chances of getting approved by having a higher down payment.
In some cases, you’ll be turned down unless you can come up with a certain down payment. On the other hand, keep in mind that paying a high down payment can get your auto loan application declined.
While paying more cash proves that you will be able to repay your loan, it also reduces the total amount of interest that you will pay on you loan. Asking a lender to take the same risk for a lower profit can backfire.
While some lenders advertise auto loans starting at $7000, many of them will not approve loans under $10K or $15K unless your credit score is top notch. The risk will just be too high for very little profit!
Overcoming a Mediocre Credit Score
If you’re worried that a less-than-perfect credit score will keep you from being approved for a loan or line of credit, work on being stellar in other areas.
For example, keep your debt low so lenders see that you can comfortably afford monthly credit card or loan payments. When you’re planning a mortgage or auto loan purchase, avoid changing employers for 18 to 24 months before the loan and save up a large down payment to show your financial security.
Finally, don’t forget to pay attention to your credit report–it may not be the only thing that lenders consider, but it still plays a big role in your approval.
This guest post was written by Eliza Collins, a seasoned personal finance writer with professional experience in the debt relief industry. Eliza writes at the debt settlement blog where you can read more about hands-on debt relief strategies, debt relief services or credit repair.
