You may be happy to learn that a common misconception held by even financially savvy individuals is that a bank’s decision to lend hangs solely on a person’s credit score. The credit score is certainly an important part of the approval and pricing criteria, but generally it is not the sole determining factor.
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Rather, the credit score is part of a number of factors lenders examine in a process called “underwriting.”
Underwriting is defined as the analysis and process used to determine whether to lend to someone. Every lender has its own criteria for who qualifies for a loan. Among the criteria beyond credit scores that a lender may consider are:
- Down payment
- Income and expenses
- Employment history
- Cash on hand
The criteria that a lender uses to determine whether you qualify for a loan − and at what terms − is for the most part in the hands of the lender or credit grantor. Your ability to ensure that the information in your credit file is up to date and accurate is within your control.
Therefore, it is important to focus your time on what you can influence. You may not be able to change the amount of cash you have available for a down payment, but if there are issues with your credit report, you can take steps to have them rectified. Making sure your credit history is accurately reflected in your credit report may improve your score enough to qualify for a loan with a lower down payment or a more favorable interest rate. Broadly speaking, understand that while your credit score is indeed a major factor in a lender’s decision to grant a loan, there are others as well.
In the meantime, always seek to practice prudent financial management and pay bills on time. However, having a diminished credit score doesn’t always mean you are frozen out of the credit market.
Each lender has its own lending goals. For example, there are a number of lending institutions that specialize in providing loans to higher risk borrowers. In particular, there are many lenders that specialize in automotive loans to higher risk borrowers who tend to have lower credit scores.
Lenders also have different “score cut-offs.” This means that one lender might offer loans to consumers with VantageScore credit scores as low as 700, whereas another might grant loans to consumers with VantageScore credit scores lower than 700.*
Although you can research which lenders have which score cut-offs, that information may be difficult to find as it is frequently not publicly available because lenders have additional criteria they take under consideration. A better usage of time and energy would be to practice financial management that builds good credit history. That history will obviously be reported by lenders into your credit files, thus improving your credit scores.
Here again, stressing what is in the credit file will pay greater dividends than having a razor sharp focus on your credit score.
*The VantageScore model’s range is 501 to 990.
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This story is an Op/Ed contribution to Credit.com and does not represent the views of the company or its affiliates.
Image: joyosity, via Flickr