Are You Creditworthy? A Look at What Your Lender Sees (and Does Investing Affect Your Credit?)
Let's get under the microscope of what your lender sees when you apply for loan. Also, does investing and trading affect your credit and vice versa? L...
If you're thinking about getting a loan for something like a house, a car or another type of loan, you might wonder what your lender sees when they take a look at your creditworthiness.
You want to have every advantage at your disposal, particularly in the face of what's going on in the housing market right now. Total housing inventory at the end of June upticked to 1.25 million units, up 3.3% from May's inventory. This figure trends down 18.8% from one year ago (1.54 million). Luckily, this fall may see a shift as prices slow down as more homes actually become available.
Let's peek behind the curtain to see what your lender sees. We'll also go over some tips for bumping up your credit score if it's not quite where you want to land.
Tip 1: It's all about risk.
Ultimately, lenders want to see how much financial risk you bring to the table. When you want to get a loan, their biggest question is this: Can you pay back your loan, and will you do so?
They use your credit score, a three-digit number that tells them how well you've paid off debt in the past, to determine how much risk you bring to the table.
Your lender may use several various scoring models, and depending on the type of financing you need, may choose a specific type of scoring model. A scoring model is a statistical analysis that a credit bureau uses to evaluate your creditworthiness. For example, if you're looking into an auto loan or mortgage, the scoring model may look slightly different from your own research.
Here are the widely accepted FICO credit score ranges, from exceptional to poor:
- Exceptional: 800 to 850
- Very good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579.
So, how risky are you in a lender's eyes, and does investing affect your credit? Let's dive into more facts.
Tip 2: Paying bills on time is a must.
Do you pay your bills on time? If so, you've landed on one factor that makes a huge difference in the course of developing a positive credit profile.
Your creditors report to the credit bureaus (Experian, Equifax, TransUnion) every time you make a payment. If you're consistently late, you'll see that fact reflected in your credit score.
This means paying all bills on time — because yes, even your utility company reports how often you make on-time payments to the credit bureaus. It shows you're a reliable borrower and will likely make your payments on time if and when you decide to borrow money.
Tip 3: Aging accounts look great to lenders.
All this means is that the older your accounts, the better off your credit will look. If you've had a credit card for 10 years and you've made regular, consistent, on-time payments, that looks great in a lender's eyes.
On the other hand, if you open a new credit card every year and close them regularly, it sends a red flag and also dings your credit.
Tip 4: Mind your credit utilization.
Of the amount of credit you're given, how much do you use? In other words, if you have a $10,000 credit card limit, do you use $9,000 of that limit every month? More?
You should aim to keep your credit utilization at below 30%. Simply divide the amount owed by your total available credit to get your credit utilization ratio.
For example, based on the above scenario, $9,000/$10,000 = 0.9 x 100 = 90%.
That's too much credit utilization and will likely affect your credit score.
Tip 5: Mix up your types of credit.
How much credit do you take on? The larger mix you have, the better you look in the eyes of a lender. For example, if you have a couple of credit cards, student loans, a mortgage and a car loan, you're sitting in a good position because you have lots of types of credit at your disposal.
Tip 6: Don't apply for credit often.
If you apply for credit all the time, it could send a red flag to your lender. In fact, it could cause a lender to turn you down for credit due to too many other recent inquiries. Your lender might assume that you're having financial difficulties or planning to spend a lot of money soon. Hard inquiries stay on your credit reports for two years, so know that they won't drop off for a while after you get them.
Does Investing and Trading Affect Your Credit?
No, most of the time, investing and trading doesn't affect your credit directly. However, it can in roundabout ways. For example, if you're investing in a margin account that starts to plunge, you may not have the collateral needed to return your margin loan. This negative information could go to the credit bureaus.
Now, think about other ways in which you'd like to invest. Let's say that instead of investing in the stock market, you see an investment opportunity in real estate in your area. If you don't have an adequate credit score, you may not get approved for a loan. This may apply to any other type of investment that you might see potential in.
How to Boost Your Credit (Including for Investment Purposes)
How do you boost your credit? Well, we've already gone over some great examples of how to do so: pay your bills on time, mind your credit utilization, mix up your credit types and don't apply for new credit often.
- Pull a credit report every year. You want to know what's going on in your credit report by checking AnnualCreditReport.com. It'll help you figure out what's hurting your score.
- Don't close old accounts. Have an old credit card that's collecting dust? Don't close it down. It can knock off points from your credit score.
- Resolve delinquent accounts. Do you have delinquent accounts on your conscience? Take charge and get rid of them. Reach out to your creditor to come up with a plan to resolve them.
- Use a credit monitoring service. Most services, which you can tap into for free, help you monitor changes in your credit report and you can get access to your credit scores through one of the credit bureaus.
A Good Credit Score Means More Opportunities
Make sure you get your credit score in a good place whether you're hankering after a real estate investment opportunity or want to get a car loan.
The most important tip of all lies in making sure that you know what's going on with your credit score. Don't stick your head in the sand and find out that you can't get approved for a loan because you haven't paid close enough attention to your credit.
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