What Lenders Look For - Your Credit Report

So let's say you've decided you've just got to have that new car you've noticed on the lot. But how do you know if you are going to be approved for a loan? Just what do those lenders look at to determine if you can be behind the wheel of your new car? Your credit report is what lenders pull when they want to determine if they can lend to you.

So what's so special about a credit report? Well, for one thing it details the history that you have in borrowing money and paying it back. A whole slew of bounced checks and missed payments and it's unlikely that you're going to be getting a loan for than new car. On the other hand, a perfect record of on time payments and things are looking up for you. But between these two extremes lies the area of judgment, and where most people fall, so what are some of the dos and don'ts?

Making sure every single credit card payment is made on time and in full is an ideal situation, but just how far can you stray and be considered a good credit risk? Generally you can get away with having a couple of credit card or car loan payments 30 days late and still be ok. Go much beyond 60 days in terms of late payments and you are starting to get into a gray area. As well, you should be up to date on your rent and/or mortgage payments at all times in order to have a good credit standing.

One of the things that lenders always try and determine is just how much debt you are actually carrying. If you are already saddled with a lot of debt, then it is unlikely that lenders will be lining up to lend you more money. It just doesn't happen that way. In general, lenders will want to make sure that your credit card debt, car payments, student loans and all other non-mortgage debt are kept to under 10-15% of your take home pay. As well, prospective lenders will also be looking at your credit report to determine just how many times a credit inquiry has been made (each occurrence normally stays on your report for two years). The reason they care? If there have been a large number of credit inquiries in a relatively short period of time, that will likely be interpreted that you are applying for loans a lot because of financial difficulty, or that you might be taking on a little too much debt and not be a good candidate for more credit.

Not only can too much credit be a red flag for prospective lenders, but having a lot of available but unused credit can also be a red flag for creditors. The worry? That at any point in time you can go and load up on the available (but currently unused) credit and become overextended. So if you have a lot of credit cards sitting around that you're not using, then consider canceling the cards outright. It will make good financial sense and will help to clean up your credit report.

In general, lenders are looking at the likelihood that you will be able to pay back the money that they lend to you. To do that, they try and assess not only your income but the stability of that income, your monthly financial obligations and what you own (do you own your own home for example). In general, the more stability and consistency you can show in your life, the more likely it will be that you get approved for that big loan.