In life, perception is reality. It isn’t always fair. And it isn’t always right.
Remember when you were a teenager? The way you dressed, the way you styled your hair, the music you listened to: all of these characteristics were used by people to make judgments about your personality. And well it might come as a surprise, lenders actually use the same process to determine whether or not you qualify for a loan. Stereotypes play a key role in credit access and perceived flaws will make or break your application.
But don’t worry, we’re not here to change you. Actually, we think you’re great just the way you are!
But, before you submit your next loan application, we want you to understand that applying for a loan is a lot like applying for a job. And when you follow our tips below, we promise, you’ll make it right to the top of the list.
Traditional Credit Risk Measures
Ever notice when you apply for loan – regardless of the lender – they all seem to ask the same questions? Well, the reason is, lenders use algorithms as a quick way to decide whether or not to approve your application.
Sorry. Algorithms are used in mathematical computer programs to quickly analyze data. When you submit answers during the application process – about your credit score, annual income and outstanding debts – the program rates each answer and tallies a total score. If you score above a certain number, you’re approved. If not…well…you know the rest.
So now that you know the deal, how do you ace your next test?
Well, it’s all about improving the traditional risk components of your credit profile.
Work On Your Credit Score:
Your credit score is the most important variable used in traditional credit risk. If you have a score 720 or above, you’re in great shape. But, if it’s 630 or below, here are some tips to get you back in the game.
- Make All Of Your Bill Payments On-Time
In a perfect world, this problem wouldn’t exist. And emergencies always seem to pop up when we least expect them. But, considering 35% of your FICO score is calculated by analyzing your payment history, staying up-to-date on bill payments needs to be a top priority. According to the Fair Isaac Corporation (FICO), a late payment of 30 days can result in a 90 to 110 point decrease in your credit score, with another 60 to 80 point drop if the delinquency extends another 30 days.
- Use Less Than 30% Of Your Credit Card Limit
Most people think the more they use their credit card, the more it helps their credit score. And if you pay off your balance in-full each month, why wouldn’t that be the case? Well, credit bureaus have their own theory on this one because – accounting for 30% of your FICO Score – your credit usage rate has a significant impact on your credit score. So what can you do? Keep your credit card spending to less than 30% of your credit limit. By doing so, you’ll start to see your credit score move in a positive direction.
- Decrease Your Debt-To-Income Ratio (DTI)
While easier said than done, increasing your income or decreasing your debt is an important step. Now, I know what you’re thinking: if it were that easy I would have done it already! We know. We know. It’s easy to tell you this in theory, but how can you actually apply it in real-life? Well, we recommend you develop a debt-repayment plan that you can both afford and stick to. Remember, small steps add-up over time and lenders will notice the effort.
Unique Credit Risk Measures
So you aced the traditional measures above. Feeling confident, huh?
Well, not so fast. Like we mentioned at the start, lenders’ stereotypes play an important role. But remember, knowing is the first step. And with the information below, you’ll know exactly what to avoid.
How Often You Change Your Phone Number:
We’re serious. Lenders actually care about this.
While seemingly absurd, lenders pay attention to how often you change your phone number. If they see you submitted multiple loan applications over the years – with a different phone number each time – it’s looked at as a red flag. So do yourself a favor and hold on to that phone number at all costs.
How Often You Move:
So what do you think lenders wish for every Christmas? STABLE AND PREDICTABLE BORROWERS!
When they see a person who moves a lot – excluding military personnel – they assume you’re unpredictable and make decisions on a whim. Lenders think: we can’t lend this person money! If they’re quick to change their mind about where to live, maybe they’ll change their mind about paying us back!
Your Level Of Education:
Now here’s a reasonable metric. Because your education helps measure your earnings potential, it also provides insight into your ability to repay debt. Many young borrowers – millennial for instance – don’t have an established credit history that shows they’re responsible. Thus, lenders use education to decide which bucket to place you in.
Your Undergraduate And Graduate GPA:
Complementing the education metric above, lenders look at your GPA a lot like they look at your credit score. When you demonstrate a steady GPA, it shows lenders you are hard-working and take your responsibilities seriously. To them, people who perform well in university are more likely to become reliable borrowers.
Your Marital Status:
As the old adage goes – two heads are better than one.
Continuing the theme from the last two metrics, being married also displays a level of commitment and predictability that lenders find attractive. There are many responsibilities that come with being married, and lenders believe – if you can handle those – you’re more likely to repay your debts.
How You Spend Your Money:
Be aware, lenders pay close attention to how you spend your money. Frivolous spending? Red flag. Large purchases? Red flag. Cash advance on your credit card? Red flag.
Not only are lenders concerned with how you repay debt, they also want to know where your money comes from and how you spend it. So before you apply for a loan, make sure your transaction history is in tip-top shape.
Your Employment History:
As we mentioned above, stability and predictably tops a lender’s wish list. And your employment history is priority number-1.
When you have a full-time job, lenders know you have steady income. Revenue minus expenses, right? They can do the math. The last thing they want to see is fluctuating hours and unstable earnings. Career growth is also important. When you demonstrate a career path that has clear direction, you become more reliable in their eyes.
Conversely, if you change jobs frequently – moving from one industry to the next – this can be a red flag. Lenders believe if you were to lose your job, you won’t have the necessary skills to land an identical position.
Your Savings balance:
We could have lumped this one with the traditional metrics above – as credit scoring models like Ultra FICO now take into account your savings balance – but most lenders still use this as a secondary metric.
Now, I’m sure you’re thinking: If I had a savings balance, why would I need a loan?
Well, in many cases, you’re right. But, in instances where the loan amount exceeds your savings balance, lenders will look at your savings as a partial safety net. If you lose your job or suffer an injury that keeps you from working, lenders know you have funds set aside to continue making payments. Moreover, if you default on the loan, they have confidence they can recoup some of the proceeds.
So what should you make of our tips above?
Well, we want you to think of them as makeup for your financial profile. And while we know that beauty is more than skin deep – by putting your best face forward – you can draw attention away from lenders’ embedded stereotypes and highlight the more attractive features of your financial life.
Listen, some of the unique factors above are rather silly, but it’s important to understand how lenders think and the process that goes into approving or denying a loan application. Stability. Predictability. They’re hallmarks of credit risk analysis. And when you convince lenders you fit that mold, you’re more likely to receive higher loan amounts, lower APRs and more favorable terms.