How Credit Granting Decisions Are Made

Once upon a time, when people actually paid cash for products and services, you had to ask, "Do you accept (fill in the blank: Visa, MasterCard, Discover, American Express, Diner's Club, etc.)?" Now it's a given.

Today, many people carry only enough money in their wallets to make it to the next automated teller machine. They purchase gasoline, clothing, eye exams, vacations, groceries, concerts, office supplies--virtually everything--with credit cards. Plastic has evolved into the currency of choice.

Yet, for some, credit remains elusive and mysterious. How do lenders decide whether to give you a credit card or a loan?

What Lenders Look For
For the most part, potential creditors review credit applications in relation to one fact only: risk. It doesn't matter how civic-minded you are or whether you're kind to animals. Hard facts count far more than mitigating circumstances.

Lenders consider information such as your income, level of education, how long you've lived at your present address, your assets, the balances in your checking and savings accounts, your promptness in paying bills, how long you've been working at the same company, and how much you owe other creditors.

All of these factors fit into three categories: character, capacity, and credit.

The Three Cs
Credit grantors develop a feeling of your character through such objective factors as length of residency and employment.

They get this information from your credit application. Depending on the lender, type of loan, and loan amount, the lender may independently verify details on your application.

Capacity refers to the amount of debt you can realistically pay given your income.

Lenders look at your living expenses, current debts, and the additional payments that the proposed new obligation would require. This information comes from your credit application and credit report.

Lenders also examine your existing credit relationships: credit cards, bank loans, mortgages, etc.

They ask questions such as:

• What are your credit limits?
  
• How close to those limits are your current balances?
  
• How long have you had each account?
  
• Do you pay your bills on time?
  
• Do you have several recent inquiries from creditors indicating the potential of other significant new debt?

A Perfect Credit Report
Happily, an imperfect credit history does not eliminate you from being considered for additional credit. Lenders pay more attention to the most recent 24 months than to 3 or 4 years ago.

For example, someone who has had credit cards for 6 months but has run all of them to the limit may not a good candidate for more credit.

On the other hand, someone with problems in the past--a series of over-60-days-late payments, say--but a good record during the last 24 months could be a good credit risk.

From this perspective, it's important to remember that regardless of your past, a better credit history can begin today.

If At First You Don't Succeed
Remember, too, that the credit-granting process has become increasingly computerized during the past decade. Computer software programs make decisions automatically for most large (and many small) lenders.

Lenders make a judgment about each applicant's character, capacity and credit, they use different criteria and make distinct decisions based on individual experiences as lenders.

If your credit application is turned down, review the reasons. Determine if you can decrease your risk factors by paying off debt, for example, or maintaining your current payments over time.

If your risk factors are minor, apply to another credit grantor. Perhaps that company will consider you an ideal customer.