Credit Evaluation Factors Revealed

Part 1

By explaining what you need to make full use of your credit report, to determine your credit standing, and to maximize your chances for credit approval this Guide developed by Metro Accounting And Tax Services, CPA will help you to:

1)Better understand your credit report,

2)Know the meaning of jargon used in the credit industry, and

3)Find out exactly what you can do to improve your credit standing.

One question that is frequently asked is how do lenders determine who is approved for a credit card, mortgage, or car loan? Why are some individuals flooded with credit card offers while others get turned down routinely?

Because creditors keep their evaluation standards secret, it is difficult for you to know just how to improve your credit rating, that is, until now. This Financial Guide explains how, and gives you a look into the practices of lenders and credit bureaus.

Credit Evaluation Factors

When you apply for a loan, how is your application processed? In some cases, such as applying for a loan from your bank, it may as simple as going to the bank, giving brief information about why you need a loan, signing a loan contract and getting a check immediately. Other banks use loan committees – a group of bank employees who decide which applications to approve. Still others use sophisticated, complex computer analysis to evaluate applications.

Other creditors use credit scoring, this is the process in which point values are assigned to various credit characteristics. Those who get enough “points” get credit. Credit scoring can vary in complexity, according to the creditor’s policy.

Most creditors also have certain minimum requirements before they will consider an application. For instance, anyone who does not have a minimum annual income (perhaps $25,000) or who has been through bankruptcy may be automatically rejected.

However, most credit-scoring systems are more complicated than depicted here, with many different pieces of data selected to be analyzed for each application. A clerk enters information from both the credit application and the credit report onto a computer system, and the system evaluates it and produces an acceptance or rejection letter. Smaller creditors using a simpler credit scoring system have each loan evaluated by a loan officer who makes the decision.

The Age Factor

If a lender’s credit experience shows that people in a certain age group have a better record of paying their bills than people of other ages, the lender may – legally – give a higher score to the better-paying age group.

However, the Equal Credit Opportunity Act (ECOA), a federal law intended to prevent discrimination in lending, does not allow lenders to discriminate against people age 62 or over. The ECOA requires creditors using a scoring system to give those aged 62 and older an age-factor score at least as high as that given to anyone under age 62.

For example: A lender gives the following age scores to applicants:

A) Age 18 -25             Point = 1

B) Age 26 – 35            Points = 5

C) Age 36 – 45            Points = 4

D) Age 47 –  61           Points = 3

E) Age 62 and above Points = 5

To prevent discrimination against older people, the lender must give anyone age 62 or older at least 5 points for age, since 5 points is the highest score available to anyone under 62 (i.e., those aged 26-35).

The Residency Factor

Creditors may take into account your geographic location in scoring your length of time at one address. If you live in a city, where people move more often, the length of time at your address will probably count less than if you live in the country.

It is important to note that many creditors give a higher score to those who have lived at the same address for at least two years. Some lenders just give extra points for living in the same area for two years or more.

Also of importance is the fact that if your address is a post office box, you may find yourself turned down for credit. Also, to fight fraud, some creditors screen out applicants whose addresses indicate commercial offices, mail drops, or prisons.

Since post office boxes or rural delivery boxes are commonplace in rural areas, however, a lender may issue a card to that address while rejecting applicants with a P.O. Box in a large city.

People who own their homes earn a higher score than renters.

The “Authorized User” Or Payment History Factor

An authorized user is someone who has permission to use a credit card but is not legally liable for the bills. If you are an authorized user on someone’s account, the payment history will likely be reported in your credit file, but you will not be able to rely on it to help you build your own credit rating.

Please not that “an authorized user status” usually will neither help you nor hurt you when you apply for a loan.

The Bank Card History Factor

The reason a bankcard is a strong reference is that it shows a bank has trusted you with hundreds or even thousands of dollars on the basis of just your signature. Also, bankcards are more difficult to get than department store cards or travel and entertainment cards, so your qualifications must have been closely scrutinized when you applied.

So, one of the best things you can have on a credit report is a bankcard-a Visa, MasterCard or Discover card that has been paid on time over a period. In a scoring system, a good bankcard reference usually carries more weight than a department store card or American Express card.

Department store charge cards have lower credit limits and if used will typically have a higher debt to limit ratio, which has a negative impact on credit scores.

In addition, American Express is a charge card. As such users must pay in full, the amount due when the monthly statement arrives. There is no minimum payment, interest rate, or spending limit, and while American Express reports the high balance to credit bureaus, it doesn’t impact FICO credit scores.

The Checking And Savings Account Factor

People who have checking and savings accounts usually score better than those who do not. Some banks give you extra points if you have checking or savings accounts with them. Some banks also give discounts on loan rates when you hold other accounts with them.

As always, the CPAs at Metro Accounting And Tax Services, stand ready to assist you with all your accounting and any financial planning issues you might be experiencing in your business or personal life. Call the office today at 470-240-5143 for expert guidance.

User | 19/11/2017