One of the best ways of staying ahead of the game is to know the expectations of your opponent. The same holds true for staying ahead of the “lending game.” By knowing what types of things lenders look for when determining creditworthiness, you can presume the outcome and plan accordingly.
Some experts suggest that previous payment history can account for nearly 35% of your total creditworthiness. That’s HUGE! Lenders want to know you not only have the ability to pay off your loan but that you will. Experts also suggest that having a favorable payment history can offset other negatives elsewhere.
Length of Credit History
Although there isn’t much you can do about your age, you can begin borrowing at an earlier one. You should never borrow money you don’t need. However–if it makes sense to take out a small car loan or credit card, you can greatly increase your credit score in two years by making loyal payments.
How Much Credit You’re Using
In the eyes of a lender, nearing your maximum credit limit is always a big no-no. Some experts suggest only utilizing 30% of your available limit. In other words, it’s more favorable to utilize three separate credit cards at 30% than to have one completely maxed out.
Proof of Income
If you have a personal freelance or contracting business but don’t file a 1040 at tax time, expect to have a short conversation with lenders. These types of businesses are widely accepted today, but being conservative and having a “W-2” pay-stub will appear more favorable than self-employed.
Mix of Credit
Having a mix of credit (car loan, credit cards, personal lines of credit, etc.) is also pleasing to lenders. It’s indicative of someone with a long and stable credit history.
Assets significantly offset a lender’s fear of risk. Having a cushioned 401(k) helps too. Even if they can’t pursue the money, they know it gives you options other than defaulting on your loan.
Recent Credit Efforts
A huge red flag goes up when you’ve recently taken out several different lines of credit. Lenders will question if you can realistically make the mortgage payment if you just financed a new and expensive sports car too.