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How Lenders Use Credit Scores to make loan decisions

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Credit scores form the backbone of any or almost all the lending decisions taken by the lenders. Credit score is calculated on the basis if the information available in the credit reports of the individuals. In fact the three credit bureaus, namely Equifax, Experian and the Transunion are into the business of getting the credit score calculations for the people. With the 3 bureaus, the credit reporting agencies are different and hence there is always a difference in the credit scores of an individual when referred to the credit bureaus separately.

Your credit score is a three digit number, calculated using complex mathematical formulas which takes the credit information stored in the credit report at the base of it. The number is taken as the parameter of the financial credibility of an individual. For the lenders it means how likely are you going to make the repayments of the loans you take from them.

No matter what is the kind of loans you take be it mortgage, auto loans, the credit score is checked before the approvals. Nowadays even in the credit card approvals, insurance, the credit score decides the insurance premium and the credit limits you will be offered by the credit card companies. Anyone with a higher credit score is likely to get better deals when it comes to any of the financial services they avail.

Determining Credit Risk

Credit scores offer several indicators about an individual’s financial behavior and credibility. Let us take an example to understand it better. John has been making regular payments towards the mortgage loan taken for the past 24years.  he hasn’t taken any new debts. There are no defaults, delay in payments, CCJs or bankruptcies in his credit report. On the other hand, Roger, has four cases of delayed payments on the two credit cards in his name. He has already maxed the credit limit on the two cards. The credit report shows multiple enquiries related to new credit card applications. He is likely to have a lower score as compared to John.

The US uses the FICO system of credit scoring. Under this scoring method, different weight age is assigned to the several components of the credit report.

Why Lenders Use Credit Scores

Prior to the credit scores, the lenders took a detailed view of the credit reports of the applicants. They would look at the payments made, debts taken , debt requests under consideration and several other details which included the payment trends, any late payment details, defaults or bankruptcy, any liens, judgments and all. All this gave the lenders a clear idea of the financial credibility of the individuals. However, at ties the lenders got biased and took wrong decisions. At other times it was the human touch which often saw borrowers being rejected for the no credit check loans they wanted desperately.

With the advent of the credit scores, the lenders are no more required to get deeper into the credit report of the applicants. All that they look at is the credit scores and decide the lending call.

Understanding Credit Scores

In the recent times, financial crisis has made people aware of their finances and the way to deal with them. With the government support people can have access to their credit report free once a year from any of the bureaus. All this had made people aware of their credit score and the way they affect our lives.

Finally, one should remember that the credit scores are dynamic. Any negative entry in your credit report can affect the credit score negatively. Fixing credit score is no easy task as it takes months to regain the lost numbers.

Category: Debt Management
  • Joy says:

    21-08-2008 Experian 189 View Report

    20-08-2008 Callcredit 730 View Report

    20-08-2008 Equifax 761 View Report

    It states equifax and creditcall is excellent and

    What this means is:

    credit items apt to be open to you is high.

    * Most loan companies will consider proclaiming to offer you rates less than their standard APR and terms on loan items.

    * Loan companies are less inclined to request more information whenever you apply, for example earnings or time at job, to assist them to decide.

    It states that on creditcall and equifax

    on experian it states

    What this means is:

    * You’ve got a substandard score and the amount of financial loans and credit items apt to be open to you is low.

    * Most loan companies will consider proclaiming to offer you rates greater than their standard APR and worse terms on loan items.

    * Loan companies may request more information whenever you apply, for example earnings or time at job, to assist them to decide.

    exactly why is experian so low and also the other medication is high

    is that this normal

  • Freddy says:

    At this time, My credit rating is 513. I am trying to possess a credit rating that’ll be decent enough for virtually any apartment.

  • Bert says:

    Hi. I’ve got a fairly dismal credit rating (Under 600) due to bad choices after i was more youthful. I am escaping . from the military soon, and I’d enjoy to proceed and obtain a home, in order to start having to pay onto it instead of tossing money away on rent. I am feeling really overcome by all this, and attempted calling the Veterans administration (Veteran’s Matters, not the condition) to sit down lower together about this, however the nearest regional office is within NC and My home is MD. What are the loan companies that do not take a look at credit ratings? The only real negative stuff on my small credit history comes from charge card companies. I can care less about the subject, however i always make certain which i take proper care of the “major things” (truck, vehicle insurance, etc).

  • Shawn says:

    I lost my job 5 several weeks ago but still havn’t become just one interview and that i have dug myself into some debt when you are not able to cover things while job hunting. Now i need 1,700 now and that i aren’t able to find just one place to have it. Everything online appears to become a gimmick. I make an application for poor credit charge cards and cards for re building credit and emergency financial loans also it just keeps bouncing my in one site to another. I submit an application for something it transfers me to a different offer it found or perhaps a loan provider, where I must complete all the information again or need to pay money for any credit rating website before it states I’m able to deposit.

    Can anybody let me know what to do to really obtain a card or quick loan without upright without getting returned in one application to another? Help!

    My credit rating it’s 540 and it has a vehicle reposition onto it since i lost my vehicle towards the bank after i lost my job. And so i need something particularly for poor credit or emergency

  • Lurlene says:

    Basically had an adverse item as an funded vehicle which had an delinquent balance of 4500 what lengths lower with this bring my credit rating. And when i compensated them back does it take it look out onto the greatest score possible??