What Lenders See

This week the topic has been credit scores, how they are derived, and how to improve them. Today, I'll shed some light on how lenders interpret those scores.

For example, if your score is 713. You apply for a refinancing mortgage and the bank has a table that has eligible interest rates for each score band. The band from 700-720 allows you to get an interest rate of 5.85%. If you would improve your score to 721, you would qualify for a rate of 5.70%. On the other hand, if your score would drop to 695, you would qualify for a rate of 6.35%. Every bank and credit institution has their own rules and eligibility guidelines for lending. Terms will vary. If you are denied credit, they are required to give a specific reason as to why you were denied. This is to prevent discrimination and a chance for you to correct the problem in due time.

Here are some general indicators that your credit report will tell a lender. If you have too many consumer finance accounts on your report, they may feel that you have the ability to spend more than you could potentially pay back. They may deny credit or charge a higher interest rate because of this. Or if your account balances are too high compared to your credit limits, this can signal that you are spending more than you can afford. It is recommended that you keep your balances below 35% of your credit limit.

On the other hand, if you don't have enough history or the data is really old, lenders may be suspect of your ability to pay punctually. The more recent history gives the lender the best gauge on your creditworthiness because your credit report is just a snapshot. Financial conditions can change significantly in a year, whether good or bad.

Also, many lenders will use a median score from all three credit bureaus. Each have slightly different scoring systems and may get data from their information resources at different times. This can result in the score being 50 points or more off from another credit bureau.

There are advantages of this credit scoring system for both the lender and the consumer. Scores allow automation of loan applications so you can get an approval faster. Credit decisions are also fairer because they don't take demographic information into account such as gender, race, religion, marital status, and employment history. Credit mistakes in the past can be overruled by more recent good credit history. With the automation of the approval process, costs are reduced for the lender and more credit is available for the consumer. Also with the lender making better credit decisions, this keeps the defaults down and can allow for more favorable interest rates.

Tomorrow, there will be references on where to get credit reports and consumer information. Stay tuned ...

He is a merciful creditor, not keeping the items given as security by poor debtors. He does not rob the poor but instead gives food to the hungry and provides clothes for the needy. He grants loans without interest, stays away from injustice, is honest and fair when judging others, and faithfully obeys my decrees and regulations. Anyone who does these things is just and will surely live, says the Sovereign Lord. Ezekiel 18:7-9 (NLT)

If you have comments or questions, please feel free to contact me at the address below.
Email: DeltaInspire@panama-vo.com