Items on your credit report that lenders don’t like to see
Ever wonder what it’s like to look at your credit or loan application from the other side of the desk?
When lenders look at your credit report, “it’s really about common-sense decisions,” said Rod Griffin, senior director of consumer education for Experian, one of the three major credit bureaus.
When you apply for a loan or a credit card, lenders often check your credit score, your credit report or both. If they don’t like what they see, you’ll be rejected — or approved but with less-favorable terms.
If you want the best deals and terms, here are some items you — and your lenders — don’t want to see.
1. Late or missed payments
This one cuts to the heart of what lenders really want to know: “Are you going to pay your bills?” said Francis Creighton, president and CEO of the Credit Data Industry Association, the member organization for credit bureaus.
What you might not realize: Anything other than timely, minimum payments are seen by creditors and lenders as missed payments.
“What matters is that you’re making the payment by the due date,” Griffin said. “If you only make a partial payment — as related to minimum payment due — that’s a bad sign. A partial payment is a late payment.”
2. Foreclosures and bankruptcies
These are the two worst items you can have on your credit history — and both will give future lenders pause, Griffin said.
Seeing these items on your history “doesn’t mean they won’t make that loan,” Creighton said. “But they may price it differently.”
Foreclosures stay on your credit report for seven years. Chapter 7 bankruptcies — total liquidation — remain on your credit report for 10 years. Chapter 13 bankruptcies, in which consumers reorganize to repay some or all of their debts, stay in your credit history for seven years.
The farther in the past that a foreclosure or bankruptcy occurred — and the more the consumer has recovered financially — the less effect it will have on their credit, Griffin said.
3. High balances and maxed out cards
“A high balance, as compared to the credit limit on your cards, is the second most important factor on your credit score,” Griffin said.
High balances or maxed-out cards are “an indication of financial difficulty,” Griffin said. “Ideally, you would pay off your card in full every month and keep your utilization as low as possible. What we see is the people with the best score have a utilization ratio — the balance divided by the credit limit — of 10 percent or less.”
One credit score rule of thumb used to be to keep the utilization ratio below 30 percent. “But 30 percent is the max, not a goal,” Griffin warned. “That’s the cliff. If you go beyond that, scores will drop precipitously.” Conversely, the “further below 30 percent you are, the less likely you will default,” he added.
4. Someone else’s debt
When you co-sign a credit card or a loan, the entire debt goes on your credit report. So, as far as lenders are concerned, you’re carrying that debt yourself, and it will be included in your debt load when you apply for a mortgage, credit card or any other form of credit, says John Ulzheimer, a former credit industry executive and president of The Ulzheimer Group.
If the person you co-signed for stops paying, misses payments or pays late, that likely will be reflected on your credit report.
5. A history of minimum payments
Creditors make money when you carry a balance, but lenders don’t like to see only minimum payments on your credit report.
“It suggests you may be under financial stress,” said Nessa Feddis, senior vice president of the American Bankers Association. “You may be at higher risk of defaulting.”
Occasionally paying the minimum doesn’t signal a problem. For instance, paying minimums in January, after holiday spending, is understandable.
But consistently paying minimums month after month indicates you might be having trouble paying off the balance. Lenders who see that on a credit report may be reluctant to grant additional credit.