In addition to looking at your debt-to-income ratio, another important consideration an underwriter takes into account when reviewing your loan application is your credit report. In this second part of our three-part “Applying for a Loan” series, learn how your credit report influences your loan application. Besides understanding how underwriters assess your credit report, it’s important that you understand how to have the best credit report possible.
Every time you apply for a loan, the lender pulls a copy of your credit report. Underwriters look at the credit report to see what kinds of loans you’ve had in the past, how well you were able to pay those loans back, and your credit score. Your credit score is a calculation based on how long you’ve been using credit, the kinds of credit you’ve used, how you’ve handled payments, and how you’re currently using credit. The higher the score, the better.
So what can you do? Ensure you have the best credit report possible by following a few simple rules:
- Most importantly, always make your payments on time. Late payments can be one of the biggest factors to lower your score.
- Start establishing credit early. The length of time you’ve used credit is an important factor to your score. You’ll have a higher score when you’ve used credit for seven years, rather than one.
- It’s best if you can show you’ve used different types of credit successfully, like credit cards and auto loans.
- Be wise about how you use items like credit lines and credit cards. To get a higher score, don’t use all of your available balances. Credit scores are better when you show you have credit available without maxing out. In general, you want to keep your outstanding balance on your lines at no more than 50% of what you have available.
A key benefit of higher scores is often lower interest rates on new loans. As an example, applicants with great (high) credit scores can pay as low as 2.99% for a car loan, while applicants with very low scores can pay as high as 15%.
For more information on credit and how you can manage it, I recommend Experian.com. In addition to more tips on managing credit and improving your score, you can get a copy of your credit report to review. And visit our mortgage blog for answers to common questions about credit during the mortgage loan application process.