What factors do lenders look at when you apply for credit?

As important as your credit score is, it is not the only thing lenders are looking at when considering your application for a loan, credit card, or mortgage.

There are certain important factors to consider regarding your creditworthiness in general that may help you better understand the application process. Knowing how lenders rank your creditworthiness can help you prepare for what is to come.

To understand what lenders look at on your credit report, you should first understand how they operate.

Simply put, credit card companies and lenders want to make money. For them to do so, they have to lend money to people, as they make money from people using their credit cards or paying back their loans. Specifically, they make money from transactions using their cards or from the interest rates people pay for their loan.

For a lender to make money off a loan, they have to choose to give that loan to someone who will pay them back on-time and in full.

They don’t want to lend money to someone who won’t pay them back or will make late payments – that would mean they make less money, or in some cases even lose money.

It’s a very simple process.

Beneath a company's decision to accept or deny an application is a process called underwriting, which is essentially how the company assesses your creditworthiness.

When you first submit an application for a loan or credit card, you will give the company important information about yourself, such as your:

This data helps creditors verify your identity, but they may also use it as part of their own custom credit scoring model.

This data is also going to help determine your creditworthiness. For instance, a lender could compare your monthly take-home income to both your house payment and any outstanding debt that you have. This is called your debt-to-income (DTI) ratio.

This ratio also helps the lender calculate how much additional debt you can take on and still afford to pay them back.

Most companies will also use a credit score to evaluate your application. Some companies will have a hard minimum for credit scores, and require you to meet that number to be approved - with no exceptions. What this number is will vary from company to company.

Most companies will use established credit scoring models, such as the FICO or VantageScore scoring models to determine your credit score. Some companies may even skip using a third party credit scores and perform their own internal calculations.

In any event, you will have to meet their credit score requirements to be approved.

With some loans, such as mortgages or auto loans, the lender may consider the value of the property you are buying as collateral towards the loan. They may ask for information about the make, model, and mileage of the car you are buying. They may also ask for the home to be appraised.

Knowing these values can also help lenders decide how much you can reasonably afford to pay back, thus making sure they make their money back.

Credit reports contain a wealth of information for lenders. Your credit report contains plenty of information about your credit history, including credit card payments, loan history, and credit lines.

Lenders may use this information directly, such as using your monthly credit obligations to calculate your DTI. In these cases, credit reports are extremely important.

Other companies may focus less on your credit reports and more on their own internal system or collateral. However, even if lenders use their custom systems, they will often still refer to credit reports for other information, such as your credit and payment history.

Having negative elements on your credit report such as collection accounts, too many recent credit inquiries, or a history of late payments can significantly reduce your chances of being approved for credit. And if you do get approved, having a worse credit score or worse credit history can increase the interest rate you'll be offerred.

Other general information lenders are looking at when considering your application includes:

Depending on the lender and type of application, this information may make the difference between being approved or denied.

While your credit scores are important, there are a number of other factors lenders look at on your credit reports. Many will consider information outside of your credit reports to be just as valuable to their application process as well. If you get denied, you will be provided a reason for your denial. Some lenders such as credit unions may even work with you in order to help you understand what you need to improve in order to get approved.

Knowing what lenders are looking for can help you prepare your application and give you the best chance of being approved. If you are applying for a loan that you absolutely need, then applying will never hurt. Avoid needlessly applying for loans and credit cards, because having too many inquiries on your credit report will lower your credit score. If you are applying for something you actually need, then even if you have low credit - it never hurts to apply and see if you get approved.