When it comes to good finances, credit scores get a lot of press. Based on a formula that incorporates loan and repayment history, credit scores are often presented as the reason someone is approved for a credit card, car loan, or mortgage – or refuses one. .
However, some financial experts claim that the role of credit scores can be overstated. “It’s a very useful tool, but it’s just a tool,” says Kathleen Lindquist, Certified Financial Planner at San Diego Wealth Management. In addition to credit scores, lenders can review everything from your housing history your social media presence and credit decisions.
Mortgage and subprime borrowers may come under even greater scrutiny. That’s not to say that credit scores aren’t important, but their role can vary widely depending on a lender’s three-digit number. “If your score is above 750, the decision is made primarily on your credit score,” says Rich Hyde, COO of Prestige Financial, which specializes in auto loans for buyers with subprime credit.
People with fewer numbers may find that lenders start asking for more documentation. However, this is not necessarily a bad sign. “We’re in the business of lending money,” Hyde says. “We are looking for the right things.”
Mortgage lenders also tend to have more stringent requirements, says Lindquist. Beyond a credit score, they also research income and asset details to determine if a borrower will be able to afford a large loan over the long term.
7 other factors lenders can consider
All lenders have their own criteria, but here are seven commonly considered factors that can play a role in a credit decision.
1. Proof of income. Simply stating your income is not enough. Some lenders want to see proof, whether it’s in the form of pay stubs, bank statements, or even old ones. tax forms.
2. Investment declarations. Some lenders may also want to see 401 (k) or IRA statements, “especially for those who are retired and have no income,” says Mikel Van Cleve, director of personal finance advice for USAA Bank.
3. Employment history. Hyde says subprime lenders often look for a stable employment history when assessing the likelihood that a borrower will be able to repay a loan.
4. Housing history. As with employment, lenders seek stability in housing. Frequent movements could indicate money management issues or increase the chances of a lender not being able to track down a borrower who defaults on a loan.
5. Debt-to-income ratio. Sometimes broken down as a ratio of payments to income, this factor calculates debt as a percentage of your income. “It’s a good idea to keep that debt-to-income ratio below 36%,” says Van Cleve. However, a higher ratio may not automatically disqualify someone from a loan.
6. Recent payment history. If you already have bad credit, a lender can consider when that happened. Missed payments from three years ago may not be a problem, but missed payments from last month could reduce a person’s chances of getting a loan.
7. Social media. “Data companies keep looking for new ways to help lenders,” says Van Cleve. This includes looking on social media sites for signs that a potential borrower may be irresponsible with their money. Van Cleve quickly notes that this is a new candidate assessment strategy, not a strategy used by USAA Bank.
Surprisingly, bankruptcy may not mean that you will automatically be turned down for a loan. “A recent bankruptcy means you don’t have any other debt we have to compete with,” Hyde says.
Don’t neglect your credit score. While it is not necessary to check your credit score every day, borrowers should still know their numbers. By paying on time and keeping credit card balances low, you can increase your score and minimize the need to spend your entire financial life under a microscope.