6 Reasons Why Lenders Think You’re Risky

Do you have the experience of being denied constantly when you apply for loans and credit cards? It may be because lenders think you’re a risky bet. They are afraid that you will be unable or unwilling to pay your debt when it comes due.

Here are some indicators that lenders use to make this determination.

1. Low Credit Rating

Your overall credit score or credit rating is perhaps the most useful indicator of your propensity to repay your debt. Your credit score represents the cumulative impact of all the activities on your credit report.

If you pay your debt on time, keep your credit utilization low, apply for new credit, or open a new line of credit, it will all be reflected in your credit report.

It is very rare that lenders just look at your credit score — the single solitary figure– to decide whether or not to grant you credit. Most times, they will look deeper at some of the indicators listed below.

2. High Credit Usage

According to Experian, a good credit utilization rate is anywhere between 0 and 30%. If you have a $1,000 credit limit, a good credit utilization rate will be at $300 and below.

Using any more than 30% of your available credit will indicate to lenders that you are a risky borrower. It may signal to them that you are in desperate financial straits and may use up all of your available credit. In that case, they wouldn’t want to lend you any money.

Ideally, you should want to pay off all of your credit card debt at the end of the month and keep your utilization at 0%. But we all know that can be tough. A compromise of some sorts will be to aim for a utilization rate below 30%.

3. Payment History

Your payment history reveals to prospective lenders whether or not you’ve paid your creditors as agreed. A less than stellar payment history is a red flag if not an outright disqualifier. This is especially true if you have debts that are in collections.

A few missed or late payments wouldn’t completely damage your credit score, however, it will be reflected in your credit report and lenders will choose to interpret it however they choose.

Most records of delinquent payment history will drop off your credit report within seven years, which is a long time. You could miss out on getting favorable rates on major purchases that require a stellar payment history, such as buying a car or a house.

Luckily, there’s a way to remove delinquent payment history from your credit report. All you have to do is write your lender and explain the circumstances that led to the late payment. They may or may not agree to remove it.

Another way to remove delinquent payment history from your credit report is to dispute it. If you determine that the entry on your credit report is inaccurate, your lender is obligated to remove it.

You can get ahead of delinquent or late payment by calling your lender and letting them know ahead of time that you will be late on your payment. This way, your lender will find a way to accommodate you by adjusting your payment due date or making an allowance for the late payment.

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4. Number And Types Of Accounts Opened

Lenders are more comfortable lending to borrowers with a diverse loan portfolio. For example, they want to see not just that you have several credit cards from several different companies, but that you have several different types of credit. They want to see that you have a mortgage loan, student loan, auto loan, personal loan, etc.

Having all these various kinds of debt and paying them on time gives the lender the impression that you are a responsible borrower. It tells them that other lenders have trusted with large sums of money and that they can do the same.

You could have a flawless payment history and lenders might still be apprehensive about lending to you because you do not have multiple types of credit.

5. Debt To Income Ratio

Debt To Income ratio, which represents the percentage or ratio of your income that goes to paying your debt, is an important factor that lenders use to assess you as a borrower.

Your lenders will use this ratio to determine the amount of risk inherent in you adding additional debt to the ones you already have.

Lenders are especially keen to use this ratio when you are taking on large loans like a mortgage loan, auto loan, etc.

Consumer Financial Protection advises maintaining a debt-to-income ratio of about 36% or less for all your debt. This means that no more than 36% of your monthly income should go towards paying your debt every month, including your mortgage. Some lenders might go as high as 43%, according to the CFP. But ideally, you want to be safe and keep it at 36% or lower.

If you are a renter, not more than 20% of your monthly income should go towards paying your debt.

If you are constantly denied credit, you should consider looking at your debt-to-income ratio. It could be the culprit.

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6. Annual Income

There’s no gainsaying the fact that your income is one of the most important determinants of how much credit you can get.

While the size of your paycheck may not have an impact on your credit score, it certainly affects how much money you can qualify for.

For example, if you make $30,000 a year, even with good credit, it will be difficult, if not impossible to qualify for a $100,000 auto loan.

The logic is straightforward in this regard. Lenders will find it hard to believe that you can make payment on a $100,000 car note while making just $30,000.

If you are being rejected for credit, it could be because your income is below the threshold necessary to qualify.

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