Becoming a Stronger Applicant
When you understand the process lenders use for evaluating potential borrowers, you can take steps to improve your chances of being approved for a loan.
Check your credit history before shopping for credit
Having a strong credit score and accurate credit history is a very important factor when it comes to borrowing money. It can improve your chances of being approved for a loan at the lowest rates possible. It's especially important to check your report about six months before you plan a major purchase, like a home or auto, or a refinance or home equity loan. This can alert you to any potentially damaging data that could hurt your application, and it gives you an opportunity to resolve any errors in the report.
Finding your credit score
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Thanks to the FACT Act of 2003, you have the right to a free copy of your credit report from each of the three credit reporting agencies (Experian, Equifax and TransUnion) once a year. All you have to do is go to www.annualcreditreport.com or call 877-322-8228 and follow the instructions. Because the agencies have access to the same basic information, the differences among the reports are usually minimal. One approach may be to request a report from a different agency every four months so that you cover them all in the course of a year. That gives you an ongoing look at your status and a heads-up about an emerging problem. Your credit report is free, but if you also want your credit score, you will have to pay a small fee.
Learn the factors that influence your credit score
According to myfico.com, there are five factors that determine your credit score. In order of importance, they are your repayment history (35%), your outstanding balances and your total available credit (30%), your history of credit use based on the length of your credit file (15%), the number of inquiries you've made for new credit (10%), and the types of credit you use (10%).
Notice that these are things you can do something about. If you don't always pay on time, you can start. Remember that paying bills late can have a damaging effect on your credit history. If your loan balances are high and/or you have less than 50% of your credit limits available to use, you can use credit less until you pay down what you owe. You can stop applying for new credit. Over time, using credit wisely improves your credit history and your credit score. This can help your chances of being approved for loans in the future.
Understand what you're signing
Finally, borrowing money wisely doesn't stop once you find a lender and a good interest rate for a loan that fits your needs. Before you sign anything, be sure you understand all the documents and terminology, knowing fully what you are committing yourself to. Always confirm the loan amount, your interest rates—both the introductory rate, if there is one, and the rate or rates after any introductory rate expires—and all costs and fees, including yearly or one-time charges. If your loan is a variable rate loan, be sure you understand:
- When your rate and payment amount can change
- How often your rate and payment amount can change
- By how much your rate and payment amount can change in a given time period and over the life of the loan
Knowing how your payments can change will be important when you evaluate how taking out this additional loan may impact your budget.
The Truth in Lending Act gives a borrower three days to cancel a loan (called the three-day right of rescission, or "cooling off period") in some very specific home-lending situations. Even with that protection, you should never sign anything under pressure or if you are feeling uncertain or uneasy about any of the documents. When in doubt, be sure to bring a trusted third party along with you, such as an experienced attorney, who can help ensure your financial interests are being served properly.
As an educated borrower, it's important to know what your Three C's may say about you before you shop for a loan:
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Three C's Checklist
