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Those who are good credit risks get approval; those perceived to be bad risks can be denied. In many cases a rejected application isn't necessarily an indicator of a genuine bad risk—instead it can signal that the customer needs to do some additional homework and scrutinize his or her credit profile. The borrower can then work to improve his or her credit score and ultimately show lenders that they are indeed a good risk.
Rule One — Investigate Your Credit Rating
There are three major credit agencies: Equifax, TransUnion, and Experian. Request a copy of your credit report from one or all of these agencies to see what is on your report. If you find erroneous or outdated information on your report, you should speak to a customer service representative about disputing your report.
Disputed items may be dropped off your credit rating until the matter is resolved, but you should not assume this will help you when applying for a new loan. The goal should be to clear your report of any old information.
Rule Two — Timing Is Everything
Did you know that multiple requests for new loans or credit cards can hurt your credit rating temporarily? Every new credit card application brings with it an inquiry on your credit report. Many people find themselves in this situation because they applied for a store credit card in order to take advantage of a discounted rate offered in exchange for opening a credit account.
Unfortunately, every time you take the discount and apply for a card, another credit inquiry is registered at the credit agency. These inquiries can take up to a year to drop off the record. It is a very good idea to wait until these inquiries fall off your credit record. When you apply for a new loan, your credit score should be as high as possible to avoid getting stuck with a higher interest rate.
Rule Three — Employment History Counts
If you are considering applying for a new loan, take stock of your current employment situation. Are you considering a career change or starting a new job? It can be to your advantage to apply for a new loan while still at the old job, especially if you haven't given two week's notice yet. This can be a considerable advantage for those who work for the government or are in the military.
Your employment history can help your creditworthiness — especially if you are still in standing at a company you've worked for several years.
Rule Four — Eliminate Unneeded Lines of Credit
Your potential debt can be held against you even if you have a record of paying on time. A credit card with a $5,000 limit means you could be $5,000 in debt at any time. Eliminate cards you don't need and you cut the potential debt factor down to size, increasing your standing as a good credit risk. Multiple credit cards or lines of credit you aren't using can hurt your credit standing if those lines of credit are still open when you apply for a loan.
Rule Five — Shop Around
Loyalty to one financial institution is a noble idea, but smart borrowers know that the best deals are often found with a different lender eager to get your business. No matter what kind of loan you seek, you may find a better interest rate or loan terms by calling several banks and comparing your options.
Some banks may offer you a better rate if you call back with a competitive offer from another lender. Your research is the key. Don't accept the first offer that sounds agreeable—you may find another bank willing to compete, and a single percentage point lower can save you a lot of money over the life of your loan.
Applying for a loan means inviting careful scrutiny of your credit report, but with the right amount of planning and research you can make your credit profile more attractive to a potential lender. Your first look at a credit report may reveal some issues which need addressing before you can safely apply for credit, but the experience is one you can use for any future loan applications to give yourself an extra advantage in the process.
Investigate your credit, consider canceling unused credit cards, avoid opening new lines of credit and do some comparison shopping before filling out an application.
