Good Credit – Knowing What Counts
Having a good credit score and a solid credit history is essential to living a financially stable life. If you want to buy a house or a car, rent an apartment or take out a loan, good credit is the key. It isn’t always so simple, however. Sometimes people with excellent scores can be rejected for certain things, which can be frustrating to someone who works hard to manage their finances.
There are several things to keep in mind when applying for anything that requires a credit check for approval, as you might not realize what factors could impact the final decision.
Income Is Important
Even if you have a credit score as high as an 800, showing an income that can support what you’re applying for is extremely important. Lenders consider a wide range of factors when approving someone for credit, and income is high on that list because they need to be sure that the applicant is in the position to repay the loan. Whether it’s a mortgage, credit card or personal loan, if you don’t have the income to support the loan you’re getting your score won’t matter.
Something that goes hand-in-hand with that is whether or not you have a job. Even if you’re in between jobs and have savings to live off of, you might still be turned down due to a lack of employment.
Different Types Of Scores
Believe it or not, there isn’t just one type of credit score. There are actually hundreds of scores on the credit market and lenders evaluate different ones depending on where you go and what you’re applying for. Many people are familiar with the FICO score, but there are others that have become increasingly popular including the VantageScore — which is used by many websites that offer free credit reports.
To make matters worse, banks don’t just look at one generic score when evaluating your credit history. They actually build a custom score using a team of statisticians and make a decision from there.
When it comes specifically to getting a mortgage, many banks actually require that you have 2-4 open lines of credit that are of a certain age. While requirements vary from bank to bank, some insist that your lines of credit be a minimum of 12 or 24 months old. For mortgages, approval also depends greatly on the value of the home that you’re looking to finance. If the appraisal is lower than expected, your mortgage might be rejected.
Beware Of Rewards
Some people use credit cards as a way to earn points — opening a card, spending a certain amount to earn points and then canceling the card immediately after paying down the debt and redeeming them. Though this might seem like a great way to improve your score and get some rewards on the side, this practice can actually affect your ability to open other lines of credit later on.
An American Express customer shared their own experience of rejection with CreditCards.com, explaining that they opened a card and earned 30,000 points by spending $3,000 within 30 days. The customer, named Jake, earned the points and canceled the card. He then applied for two more rewards cards and was denied — despite having a 40-year credit history and a score of 821.
As an American Express representative explained in response to Jake’s story, the decision process could have been affected by a variety of factors having to do with the recently-closed rewards card.
“While I can’t shed light on this particular instance, I can tell you that when making a decision on an account, we consider a variety of factors: spending and payment history with American Express, debt with other lenders, reported income, credit bureau scores and other credit report information,” the spokeswoman said.
Another thing to consider is how many applications you’ve submitted recently. No matter if you’ve got a high score or not, lenders might turn down your application if you’ve had too many recent inquiries.
When it comes to applying for credit, always be sure to consider the factors that can impact the final decision. Even the perfect score can result in rejection depending on a number of factors, so it’s important to be aware of what lenders are looking for and make sure you’re in the position to be approved before you apply.