Thinking of applying for a loan? Credit matters!

If you are considering applying for a loan of any type, you will first want to ensure that your credit rating is accurate. Why? Your credit report will be the first place that a potential creditor will look to help evaluate whether or not you will be a low-risk customer.

What if you pay your bills on time every single month? For starters, keep up this good habit! However, even if you think your credit is squeaky-clean, it’s worth it to check, since it’s in your best interests to ensure that all of the information in your credit file is up-to-date and accurate. In fact, studies show that many credit files contain inaccuracies that could affect your credit rating – and even lead to the rejection of a loan application! Imagine finding out after the fact that you were rejected for a loan because of a simple human error or technical glitch. That’s why reviewing your credit report beforehand may be a good idea, giving you time to dispute any items that may be the result of simple human error or a technical glitch.
Before you begin the application process, check your credit report for the following items:

Clerical errors
Sometimes credit reports contain inaccuracies that are the result of a computer glitch or a clerical error. These may include payments not credited, late payments, or data mixed in from a credit file of someone with a name similar to yours. By reviewing your credit report before the lenders do, you’ll see exactly what they will see – but have the chance to fix anything that’s wrong before it’s too late!

The solution: Keep in mind that it’s up to you to dispute any information that you consider inaccurate, but the effort involved can be well worth it in the long run.

Excess unused credit
Do you have credit cards in your wallet that you only sporadically use? Any that you never use? Consider that these can in fact hurt your credit rating, since lenders sometimes see too much ‘revolving debt’ as a negative when reviewing loan applications.

The solution: Consider reducing the number of revolving charge accounts that are listed as active on your credit report. If you’ve stopped using a credit account, close it if you don’t plan to use it anymore. Important: Make sure your creditor notates the account “closed at consumer’s request” - otherwise, a prospective lender might assume the creditor closed the account for other reasons.

A few credit cards managed well may improve your chances for a loan. Maxed-out cards are undesirable, and interestingly enough, cards with lots of room on them can be a bad thing too. You can always call a creditor and ask them to drop the limit of your card, which can help take out some of that excess room.

Late payments
If you slipped up and have a couple of 30-day late payment entries that are accurate, don’t worry too much: if your credit is good otherwise, often a lender will overlook this if you explain the situation. However, 60-day late payments are less likely to be overlooked. You may be ‘red flagged’ and if the loan is still granted, the interest might be higher and the terms less favorable.

The solution: Be prepared to explain any late payments. Also, since lenders usually look most closely at the last two years, if you’ve slipped up lately, make a solid effort to get those payments in on time, every time.

Unnecessary inquiries
Did you know that each time a prospective creditor looks at your credit report, an inquiry notation is added to your file? Most inquiries stay on the report for up to two years. Note, however, that inquiries you make yourself, during screening for a pre-approved offer of credit, or as part of a background check for employment purposes are not reported to potential credit grantors.

The solution: Avoid over-applying for credit and running up excessive inquiries, simply because you don’t want lenders or creditors to assume that you have financial difficulties or are taking on more debt than you can repay. Of course, lenders understand that some inquiries will be as a result of shopping around for the best rates on a loan, so they often overlook a block of inquiries within a very recent period. It can help to note this in the application process.