How Do Lenders Judge People With Bad Credit?

If you’re planning to apply for a loan or credit card, you may be concerned about your credit score - and how it will affect your chances of approval. 

You’ll be happy to hear that bad credit customers don’t go through a different screening process than anyone else. In fact, the criteria that lenders use to evaluate loan applications are almost always the same. 

Let’s take a look at the factors that will make the biggest difference to your application. 

Payment History    

Every lender needs to feel confident that they’ll get their money back - and that’s where payment history comes in. 

• Payment history counts a full 35% toward your credit score. That’s a strong indication of how important it is to lenders. 
• A borrower who has paid their installments on time in the past is likely to do the same in the future - and the better your track record looks, the more likely your application is to be approved. 

Current Debt

The amount you currently owe on your various credit accounts can have a big impact on a lender’s decision. This factor makes up 30% of your FICO score. 

• Having high balances on your credit accounts means higher monthly payments - and that tells lenders that there’s less money available in your budget to cover new debt installments. 
• Your credit utilization (the percentage of your available credit that you’re currently using) should be at 30%. Anything above this level is a bad sign for lenders. 

Credit History

This factor has to do with the length of time your current accounts have been open. The longer you’ve been managing an account successfully the more confidence lenders will have in you.

• Credit history makes up 15% of your FICO score.
• You’ll want to think twice before closing credit card accounts that you don’t use anymore since this could shorten your credit history. A low or zero balance with a long payment history looks very good to lenders. 

Types Of Credit Used           

Many lenders like to see a variety of credit accounts (often referred to as your credit mix) on your report. This factor counts 10% toward your score. 

• The more types of credit you’ve used responsibly in the past, the more likely you are to manage your new credit account successfully.
• Ideally, you'll want to have at least one credit card account, a mortgage, and one type of loan listed on your credit mix. However these accounts should all be in good standing.

Opening Multiple Accounts

If you’re trying to achieve a diverse credit mix, you may think it’s a good idea to apply for a couple of credit cards and loans in the months leading up to your application. This could be a serious mistake.

• It may seem like a contradiction, but applying for a lot of credit all at once isn’t the best way to improve your credit mix - in fact you could lose points on your FICO score. 
• Recent credit applications count 10% toward your score - and less is definitely more. 
• You’ll want to leave a gap of several months between applications for a given credit type - but multiple applications for the same type (like when you shop around for a mortgage) won’t affect your credit score too badly. 

Beyond The Report: Income, Savings, and Employment Stability

Your credit score isn’t the only thing that makes a difference when it comes to a successful application. 

Lenders assess each applicant on a case by case basis and your overall financial situation will play a big part in the outcome. 

• The higher your income, the more money you have to budget with each month. However, if your expenses are high too, you may not benefit as much from the positive impact of a large paycheck.
• Your savings can be used to secure a loan (as collateral) and will also give your lender a good impression of you as a financially responsible person. 
• Stable, full-time employment or self-employment with a successful track record of income always look good on an application. 

Conclusion

Knowing what factors influence the outcome of your credit application is essential when you apply for a loan with bad credit. 

Your payment history, total debt, credit mix, credit history, and recent applications all play a role in your credit score - and lenders always scrutinize these numbers.

Credit score aside, you’ll stand a better chance of being approved if you have a regular substantial income and a healthy amount of savings. These factors can help you get approved even if your FICO score is well below 700.