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Credit Report & Scores

How Lenders View Your Credit

If you've ever borrowed money, you've likely wondered what lenders look at when they consider whether or not to approve you for a loan or credit card. The lender's primary objective is to determine whether you are a good or bad credit risk. Hopefully, you are already monitoring your credit scores to keep them as high as possible, but your credit scores are only one factor used to assess your credit stability and ability to pay back a loan.

The other factors that lenders look at make up your financial profile. These include your credit history, payment history, income and overall financial situation. While each lender assesses your credit history differently, they will all look at what is known as the "five Cs" of credit. They are:

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1. Capital

This is the money or cash that is available to you through savings, investments or any other assets that you can use for repayment of a loan. Your household income is viewed as the main source of repayment, but any extra capital you show lenders tells them that you have saved money and manage your finances well, making you less of a credit risk. Additional capital on hand can help you in case of emergencies such as losing your job.

2. Capacity

This is your monthly income and how stable it has been over an extended period of time. Lenders want to see that you can afford your payments. Often lenders will do so by reviewing your income, work history, and stability along with your earning potential as a way to project your ability to pay back the borrowed debt.

This can be done by evaluating your debt-to-income ratio (DTI), which compares the total amount of debt you owe each month with the total amount you earn. A higher debt-to-income ratio could mean that you are seen as a credit risk and may not be able to afford your loan payments. Lenders can even predict a borrower's likelihood to make payments on time during the length of the loan.

3. Collateral

This is something that you own that can be used for any loans or lines of credit that you apply for that are secured by that possession. A secured loan, such as an auto or home equity line of credit loan (HELOC), means that you will pledge something that you already own as collateral.

That collateral will have a value assigned to it, and any debt that you already have will be subtracted from the value. What is left is the remaining equity that lenders will consider as a factor in their lending decision.

For example, on a home loan, lenders can take possession of your home if you default on the mortgage. They will get an appraisal of the home to get an accurate value of what it's worth to make sure it is worth at least as much as the loan amount you are borrowing. Your collateral is then seen as the officially appraised value of the home.

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4. Conditions

This can include the interest rate for a credit card or loan or the amount of money you are borrowing as the lender decides whether to approve you. Conditions can also include the lender asking how you plan to use the money you are borrowing.

The amount you plan to borrow and how you plan to use it can influence a lender's decision. Other conditions that can be considered include the current state of the economy or even different lending trends for that industry, such as the impact of the Great Recession on the mortgage industry in 2008.

5. Credit History

This plays a large role in a lender's decision to qualify you for a loan or credit card. Your credit history is your financial track record that shows how you have managed credit and made payments over time. This history can be seen in your three credit reports, which provide all the information from lenders that have previously given you credit.

This data can vary among the different credit reporting agencies but will include the same information such as the names of lenders that extended credit, the types of credit, your payment history, and more. Most lenders like to see a good payment history, low amounts of debt and no missed or late payments. Your credit history is captured into a single number known as credit scores.

Your credit scores are one of the first things that lenders look at when assessing your credit history. Having a good credit score increases your odds of getting approved for a loan and helps with the conditions of the offer, such as what the interest rate will be. There are many different types of credit scores. FICO® Scores and VantageScore® are two of the more common types of credit scores, but other industry-specific scores also exist.

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Factors That Can Affect Your Credit Score

The degree to which different information impacts a credit score varies depending on the scoring model being used. Changes in your credit report can also explain discrepancies between the score you saw previously versus the one the lender shows you in person or over the phone.

If for some reason a lender does not approve you for a credit card or loan because of your credit score, they are required to send you a copy of that credit report they used. Credit scores are generally affected by these elements in your credit report:

  • Payment history for loans and credit cards, including the number and severity of late payments
  • Credit utilization ratio
  • Type, number, and age of credit accounts
  • Total debt
  • Public records such as a bankruptcy
  • How many new credit accounts you've recently opened
  • Number of inquiries on your credit report
  • What Is a Good FICO® Score?

    The FICO® Score, which ranges from 300 to 850, is one of the better-known types of credit scores used by many lenders. Generally, a FICO® Score above 670 is considered a good credit score, and a score above 800 is looked at as exceptional. FICO® Scores are calculated based on the importance of the five categories and consider both good and bad information in your credit report. For example, late payments will lower your FICO® Scores, but making payments on time consistently can help raise your credit scores.

    FICO® Score Factors (By Percentage):

  • 35% is based on your payment history on loans and credit cards.
  • 30% is based on total debt and amounts owed.
  • 15% is based on the length of credit history.
  • 10% is based on new credit accounts.
  • 10% is based on the credit mix or the type of credit card or loan accounts you have.
  • What If I Don't Have a Credit History?

    For the most part, credit scoring systems like to see at least six months of credit history in order to calculate a credit score. If you don't have a long enough credit history, you are considered to have a "thin credit file."

    More than 45 million Americans have either no credit history or a credit history that is too thin or not long enough to build a credit score. You can build your credit history by opening up a credit card account to demonstrate that you can manage credit well.

    Consumers just starting to build their credit history might consider a secured or prepaid credit card, which can help them manage their spending and establish a credit track record at the same time. You also want to be mindful of not applying for a lot of new credit accounts at the same time, because that may give lenders the perception that you are a credit risk.

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    What If I Don't Make a Lot of Money?

    Income does not factor into your FICO® Score. People with lower or higher incomes can have the same financial issues when it comes to credit usage that impacts credit scores. Lenders are more concerned with your responsibility toward repaying your debts over time, not how much money you make. If you don't pay your bills on time, your credit history and payment history will reflect that.

    Lenders will look at your debt-to-income ratio, which compares the total amount you owe every month to the total amount you earn. Lenders want to see an ideal debt-to-income ratio to help them better understand whether you are living beyond your means along with your ability to make payments on the loan.

    How to Dispute Credit Report Mistakes?

    If you have something that you believe is incorrect in your Experian credit report, you can file a dispute on the Experian website. In most cases, disputes are completed within 10 to 14 business days and usually within two to three days. The type of dispute and how quickly the lender or other data furnisher responds determines how long the dispute may take to resolve. Experian allows 30 days for the dispute process to be completed.

    Once you have submitted your dispute, Experian will forward your dispute to the organization that provided the information so they can investigate. The source of the disputed information will respond to Experian and verify whether there is a change or update that should be made or whether the item should be removed from the credit report. If no errors are found, the item will remain as reported. Experian will notify you of the results of the dispute. If changes are made as a result of the dispute, the source of the information must also notify the other two major credit reporting agencies, so that the information can be updated on those reports as well.

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    What If I Was a Victim of Identity Theft?

    If you were the victim of identity theft, a fraud alert may appear on your credit report asking lenders to verify your identity before approving you for a loan. Being a victim of identity theft won't stop you from being approved, but it could slow down the approval process. If you add the alert to your credit report, then you can request a free copy of your report. It can also be a good measure to stop criminals from taking out new credit cards or loans in your name.

    The initial fraud alert will stay on your report for 90 days and gets shared with the other credit reporting companies. This way you have time to check your credit reports and make sure there are no signs of fraud.

    If you do see evidence of fraud, you can add a fraud victim statement that lets you state that you were a victim of identity theft and ask lenders to contact you before approving any credit in your name. In order to add a fraud victim statement to your file, you have to file a police report first. The statement will remain on your credit report for seven years and is also shared with the other national credit reporting companies.

    See the best credit cards for you now in Experian CreditMatch.

    Check Your Credit Today

    It is a smart strategy to check your credit report and know your credit score before submitting an application for a new loan or credit card. Learning how lenders see your credit in advance can help you take steps to improve your credit score or clean up mistakes on your credit report.

    Keep in mind that the credit score you see could be different from the score a lender uses based on the factors we discussed above, but it still can be used as a gauge to see where you stand when it comes to your credit history.


    Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer, or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
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