Whether you’re applying for a mortgage, taking out a loan or applying for a new credit card, most lenders will check your credit score in order to minimize their risk. The better your credit score, the lower your perceived risk to a lender and the higher the likelihood of approval for a line of credit. 

In the U.S., a credit score is a three-digit number between 300 and 850 that serves as a snapshot of your credit history. Based on this number, lenders can better assess how you manage your finances; however, those three numbers don’t determine everything. Lenders typically do a complete analysis of your entire credit history before they approve your request for a new product. Here’s an overview of which information creditors analyze when they check your credit report including payment history, overall debt, credit history length and more. 

What do lenders look for other than the credit score? 

Payment history

Your payment history is the most important part of your credit history as it accounts for 35% of the credit score. Lenders want to ensure that they will be repaid for money they’ve lent or the services they’ve offered. By reviewing your payment history, lenders can determine the likelihood that you will repay them on time. 

If you have consistently repaid your debts, you are more likely to be approved for a line of credit and offered more favorable rates. You may be less likely to be approved for a new line of credit if you have a history of late payments. The same thing goes if your credit history shows that you have defaulted on your loans or have applied for bankruptcy. If you are approved for credit under these circumstances, you may receive a smaller line of credit and less favorable interest rates.

Amount of debt 

Lenders also want to ensure that you manage your credit line responsibly and don’t overextend yourself by taking on debt you can’t pay back. 

Credit utilization refers to the amount of debt owned compared to the amount of credit available to you. It accounts for 30% of your credit score, making it the second most important factor affecting your credit. Maintaining a low balance is important because lenders may view high levels of debt as a sign that you may struggle to pay off new lines of credit. 

Length of credit history 

The next thing that lenders will examine when checking your credit is the length of your credit history. A longer history and a good  track record generally means that you are more likely to be a responsible borrower. How often you use your credit is also a factor that comes into play.  

The length of your credit history accounts for 15% of your credit score;. While it’s not as important as your payment history or amount of debt, the length of your credit history can still influence a lender’s decision to approve your credit application. For example, you may still be approved for lines of credit if you have a short credit history but you may have to pay higher interest rates as short histories do not provide lenders with enough information to predict how you manage your debts. 

New credit accounts 

New credit accounts make up 10% of your total credit score. Lenders typically do not want to see that you have opened several new credit card accounts or that you have taken out multiple loans in a short period of time. 

Multiple new accounts in a short period of time is considered a red flag because it could indicate that you are struggling financially. If you’ve opened several new accounts at a time, there is a chance that you may not be able to pay back additional debt. If you’ve opened up numerous new credit cards or taken out multiple loans over a short period of time, your chances of being approved for any new lines of credit may be lower. 

Types of credit 

Auto loans, mortgage and credit cards are just some of the ways you use credit. Lenders typically prefer to see variety in your types of credit because it shows experience managing multiple forms of credit. There is revolving credit such as credit cards, for example, as well as installment credit (mortgages, auto loans, personal loan and more. The type of credit you have on your credit report accounts for 10% percent of your credit score. 

Factors outside of your credit score 

The factors above aren’t the only ones that lenders consider. Beyond your credit score, debt-to-income ratio, down payment amount and loan-to-value ratio can also play a role in your application for a new credit product. 

Debt-to-income ratio

Your debt-to-income ratio refers to the amount of money that you owe compared to the amount of money that you earn. 

You are less likely to be viewed as a risk by lenders if your income is high and your debts are low because lenders are more likely to assume that you have disposable income available to pay off any new debts. However, a high income does not necessarily mean better rates if your fixed expenses such as auto loans, mortgage payments or your rent are high. In a lender’s eyes, the higher your fixed expenses are, the less disposable income you’ll have to pay off new lines of credit. Therefore, a lender may charge you a higher interest rate to protect their interests in these circumstances. 

Down payment amount 

If you’re taking out a loan to purchase a home or a car, the amount of your down payment can have a big impact on whether or not you’ll be approved as well as your rates. The more money you put down, the less money you’ll need to borrow—less risk to the lender who will be financing your purchase. 

Lenders may be more inclined to offer better interest rates to people with large down payment, but this doesn’t mean that you should drain your savings just to put more money down for a better interest rate.

Loan-to-value ratio

The value of assets such as property or vehicles when you apply for a mortgage or an auto loan may help you get credit and better interest rates because these assets will act as collateral for the loan. 

Loan-to-value ratio refers to the value of the collateral compared to the total amount of credit requested. A better ratio may make the lender more likely to approve your application and provide a better interest rate. However, if your collateral is less valuable compared to the amount of money you apply to borrow, your interest rate may be higher.  

Employment history 

Lenders also want to make sure that you have a stable source of income. For example, you may not be approved for a line of credit if you only recently started at your current position despite having a high salary. A longer employment history is important because it may indicate a lower chance of change in employment status over the life of the loan. 

Loan terms 

The length of the loan is another important factor that may affect your chances of being approved for a loan and the type of interest you’ll have to pay. Lenders are generally more likely to approve shorter loans. They may also offer better rates under the assumption that your ability to pay is not likely to change over a short period of time. On the other hand, the longer the terms, the greater the chance that your ability to repay the debt will change.

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