What Impacts Lending Decisions?

Applying for a loan is often a straightforward process, but the reasons you're approved or denied for it aren’t always so clear. Many factors impact an individual's ability to be approved for a loan. We've listed some common reasons below.

Your Credit

While denials aren’t solely based on your credit, it does play an important role. Your credit is one indicator to a potential lender of your likelihood to repay a debt. When a lender is checking your credit, they're likely checking one of two things – your credit report or your credit score.

• Credit Report: Your credit report is a record of your financial history. It includes four main sections – personal information (such as your name, date of birth, and Social Security number), accounts open (sometimes also called "trade lines"), public records (such as bankruptcies or foreclosures), and inquiries (instances where someone has checked your credit).

 It's important to ensure that the information in your credit report is accurate so that lenders see a clear picture of your finances. Additionally, monitoring your own credit report can help you detect and prevent fraud by staying aware of what's been done in your name.

 You're entitled to one free credit report each year (a 12-month period, not a calendar year) from each of the three major credit reporting bureaus. While many places will offer "free" credit reports online, many will also try to sell you things or collect your credit card information. For your free reports, visit www.AnnualCreditReport.com. 

• Credit Score: Your credit score is a three-digit number that’s calculated using information in your credit report. It’s generally calculated based on five components: payment history (35%), amount owed (30%), length of credit history (15%), credit mix (10%), and new credit (10%).

While the percentages above represent the general calculations used to determine your credit score, it can vary based on the individual, as well as which scoring model is used. For instance, some lenders may use a credit score that’s designed more specifically to consider an individual for an auto or home loan.

Unlike your credit report, no one is obligated to give you your credit score for free each year. However, eligible PSECU members can enroll in our free credit score service* to receive updates to their credit score for free each month.

If you'd like to improve your credit, check out the "credit" section of our blog.

Your Debt-to-Income Ratio

Even if you have stellar credit, other factors can cause you to be denied for a loan. One of these is your debt-to-income ratio.

Your income isn't factored into your credit score, but it plays an important role in this calculation. Even if you can manage your debt, if it accounts for too large a percentage of your income, lenders may be concerned that you can't afford to take on owing more.

To learn more about your debt-to-income ratio, check out this helpful article.

Your Income or Employment

Even if your debt-to-income ratio and credit are in good standing, a lender could deny you because you don't have a high enough income. This could raise concerns that you're unable to pay back a debt.

Additionally, even if you have a high enough income, a lender could be wary if you have a recent gap in your employment or a sporadic employment history overall. This could cause concerns that even if your income is sufficient now, it may not be in the future.

Additional Resources to Grow Your Knowledge

If you find yourself wanting to learn more about any of the topics listed above or personal finances in general, we have a wealth of resources available to help you. The best part? They're all free. Check out our WalletWorks page for money management tips and tools.

*PSECU is not a credit reporting agency. Members must have PSECU checking or a PSECU loan to be eligible for this service. Joint owners are not eligible.