Four Reasons Why Your Lender Hates Your Credit

When a lender looks at your credit score, he assesses your credit habits, your creditworthiness, your tendency to pay back debts, how responsible you are with credit and most importantly, what kind of risk you pose to his business.

Based on that assessment, he will decide whether or not to approve your loan, credit card or other line of credit. In return, he hopes to make money off of you without risking much of his own money.

With his money on the line, there are some cases in which a lender would just hate your credit. The following four reasons could mean trouble to him.

1) He Can’t Make More Money Off of You

If you have an excellent credit score of 720 or higher, you’re more likely to be approved for the top credit cards and best loan offers. How’d you get to that top credit score in the first place? Your great credit score tells your lender that you’ve demonstrated good credit management in the past and thus you’re likely pay off your debt month to month. This is great for you, but kind of bad for him. He’s used to collecting interest and late fees from individuals who carry over credit card balances and don’t make payments on time, but he’ll be out of luck with you.

Same goes for a home mortgage; your great credit score means you’ll qualify for better terms and a lower interest rate, which means a smaller profit margin for lenders.

Your excellent credit standing is bittersweet to lenders: You aren’t a big risk, but you’re also not much of a paycheck.

2) He Takes a Big Risk by Lending to You

If you have a poor credit score in the 500-600 range, lenders could profit handsomely by charging you exorbitant interest rates on loans and an annual fee or security deposit on credit cards. However, your lender knows he’s taking a huge risk with you. Your low credit score means you may have mismanaged some of your credit in the past, defaulted on payments or had a derogatory mark like a bankruptcy or foreclosure. It also tells your lender you’re more likely to do it again, maybe even on the loan or credit card he approves you for.

A lender wants your business because it means a big payoff in overcharged prices and inflated rates, but you also may spell big losses if your bad credit behavior continues.

3) He Can’t Figure You Out

Lenders assess your creditworthiness by examining your credit history. If you have little or no credit history, how can they figure out what kind of a risk you are? For young people new to the credit world, getting approved for credit can be especially difficult because lenders can’t accurately assess your creditworthiness.

However, the VantageScore credit score model, created in collaboration by all three major credit bureaus, is based primarily on the last 24 months of a consumers’ credit report to better assess those with a thin credit file. More accurate assessment of young consumers’ creditworthiness may mean better profit opportunities for lenders.

Tip: If you are a thin file consumer, establish your credit history with a secured credit card. Once you start building credit, be wary of predatory lenders looking for your business.

4) He’s Afraid You’re Giving Up on Him

A study reported by TransUnion states that there are eight million inactive credit card accounts in the U.S. today. Most of those eight million are in the “high risk” category of consumers, which means they have lower credit scores and higher interest rates. That’s eight million credit cards for which lenders aren’t collecting fees or interest, and may have to charge-off in order to save themselves from even bigger losses. These numbers may indicate a decline in credit card use in general as consumers switch over to debit or cash. Less credit utilization could mean less business for lenders.

When it comes to the world of borrowing money, you want your lender to hate your credit score for only one reason: It’s so high that he won’t make more money off of you. He’s forced to offer you the best rates and best terms as his profit margins shrink, and you and your credit win.

Work towards that goal by keeping up healthy credit habits. Credit Karma will be back next time with a post on why your lender loves your credit.

Credit Karma™ is a completely free credit management service that provides free credit scores, financial education, and personalized savings recommendations. The company believe free access to one’s credit score and report is a fundamental consumer right. Credit Karma helps more than 2.4 million consumers realize the everyday cost savings of having a good credit score.