How Do Creditors Determine Whether to Grant You Credit?

Do you know how the bank determines whether or not to issue you a credit card? Moreover, do you know why you get an interest rate that is slightly higher than your neighbor’s, even though you both carry the same card? You do know, of course, that institutions issuing credit cards and offering loans check applicants’ credit profiles. They search for red flags that determine whether or not an applicant is a good credit risk or might in the foreseeable future default on the loan. In the cases of unsecured credit – as is the case with credit cards, this is especially crucial to prevent banks from consistently losing money with defaulting customers. Yet did you know that – even worse than the occasional late payment in the last couple of years – is the quantitative summary of your credit record, as reported in your credit rating?

You are considered to be a good credit risk if your credit score is between 700 and 750, while a very good credit score is expressed in a listing ranging from 750-800. Customers with this kind of credit rating are routinely offered the most advantageous loan and credit products, lower interest rates, and other money saving opportunities. A middle of the road credit score of 650-700 still qualifies a good many consumers for a variety of credit products, but the rates are likely going to be slightly higher. Interest rates will be higher and some exceptional loan products most likely will not be offered to consumers with fair credit ratings.

A bad credit score – 600 to 650 – or a very bad score of below 600 points will result in denied credit, or at the very least in expensive credit. The lower the credit score, the more a consumer should expect to pay for any kind of loan product. In the majority of cases, the extreme expense of credit can only be counteracted by presenting the lender with a cosigner who has excellent credit. Even so, the odds are good that any credit card or loan will carry a significantly higher interest rate and perhaps also lower credit limit, to prevent the consumers from defaulting. Consumers without any kind of credit rating are oftentimes considered a poor credit risk until they manage to persuade at least one lender to take a chance on them and then prove that they are able to handle credit properly.

The credit score providers lenders with a summary judgment of your use – or abuse – of credit. This number determines if your debt to income ratio is too high, flagging you as a potential future credit risk. Public records, such as bankruptcies and repossessions, also factor into your credit rating. If you lose a home to foreclosure, a car to repossession, or negotiate your credit card balances with the help of a debt settlement agency, your credit score goes down. Moreover, if you have too many open credit cards accounts on your record or too many inquiries from creditors on your account, your credit profile will once again go down.

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