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You’ve always paid your bills on time and never missed any payments, yet you’re still struggling to get approved for a loan or credit card, how can that be? Your credit report contains a lot of obvious information, such as your ability to pay your bills on time, but it also has other information that you may not have considered or known about. Lenders are trained to identify risk in their candidates through a series of policies and mandates, for this reason, red flags may not always be as evident to you as they are to lenders.
Credit reports can be obtained from Equifax or TransUnion, Canada’s two credit reporting agencies. These agencies collect information related to all your credit history and generate a credit report with your name on it. Information that can be found on your credit report is your personal information, employment history, consumer statement, account information, public records, and inquiries. Credit reports are quite detailed, to get a better idea of what’s on your credit report, you can get a free copy from both Equifax and TransUnion every 12 months.
Interested in learning about how your credit score is calculated? Click here.
Why Are Lenders Afraid of Your Credit Report?
Part of the risk rating process for lenders is to check your credit report because it tells them a lot about your spending history and ability to manage finances. If they see something they don’t like on your credit report, you’ll be rejected or accepted with unfavourable conditions.
Short Sale on your House
A short sale is defined as a real estate sale where the net proceeds are smaller than the debts, such as your mortgage, against the property. In the instance of a short sale, the lenders responsible for collecting the debt tied to the real estate accept less money than the actual amount owed to enable the sale to occur.
Often, people are under the assumption that a short sale won’t impact their credit report when, in reality, it does (read this for more information about how a short sale affects your credit). On your credit report, the account related to your mortgage and short sale shows as closed, but was settled at less than you agreed to pay initially. It is possible to negotiate with your lender to ensure that a balance owing doesn’t appear on your credit report. If you manage to negotiate with the lender, the blow to your credit report will be less significant.
Even though short sales impact your credit report, it may be your best option to get out of a bad investment. If you are in the midst of a short sale, be sure that you’re aware of the consequences and discuss how the short sale will appear on your credit report with the lender.
Check out the top 5 most common credit report errors.
An Bbundance of Loan Applications
If you have applied for many loans, credit cards, and other new accounts in a short period of time, lenders will consider your financial state to be shaky since you’ve been asking other lenders for a lot of money. Keep in mind that opening an account every now and then is perfectly normal.
Credit Card Cash Advances
Generally speaking, cash advances are only used in cases of urgency when you need cash right away. Often, individuals who need cash immediately are in a situation where they’re unemployed or recently lost their job.
Cash advances lower your available credit leading to a lower credit score, all of which a potential lender sees. Another issue with cash advances is how large card issuers evaluate the behaviour of their customers. Card issuers will pull credit reports, credit scores, and account histories for all of their customers and input the information into their own credit scoring system. These unique credit scoring systems tend to penalize people who have used cash advances because they’re considered to be transactions of risky people.
The card issuer has the authority to reduce your credit limit or cancel your account based on your activity. If this happens, your credit score will take a hit, thereby signifying to other lenders that you’re not an ideal candidate.
Frequent Minimum Payments
Lenders don’t like seeing only minimum payments on your credit report because it indicates you’re financially stressed (what is the minimum payment trap? Click here). Sure, lenders make money off people who carry debt, but it is not something a lender favours if they have the choice.
Occasional minimum payments are understandable, you’re only human after all! Although, minimum payments every month for extended periods of time suggest that the applicant won’t be able to pay off the existing balance, let alone any future debt.
Another Person’s Debt
If you co-sign a loan or credit card with someone else, the total debt will appear on your credit report. Lenders don’t consider the fact that you’ve co-signed, they will assume that the entire debt is attributable to you. The more debt you have to your name, the more concerned the lender will be because, if something were to go wrong, you could default on payments.
In the event that the other co-signer misses payments or ceases payments, the activity will be reflected on your credit report. Of course, this will negatively impact your credit and count against you when you go to apply for a loan down the road.
Significant Credit Inquiries
Anytime you apply for a loan, the potential lender usually pulls your credit report which appears on your report as an inquiry. The impact of a high number of inquiries varies based on the individual’s current credit score and consumer type. Someone who has a low credit score and a high number of inquiries will be impacted worse because it is assumed that they’re struggling financially and can’t get money from lenders for a reason.
Do you know who can pull your credit? Learn here.
Luckily, there is a loophole in the inquiry reporting system. The inquiries will be considered as one if your report is pulled numerous times within a 45 day period. If you’re going to apply for several loans, make sure to apply at the same time to avoid racking up your inquiry count. It is important to note that this loophole doesn’t work for credit card applications.
Improving Credit Health
Your good financial history shows up on your credit report, but so does your bad credit history. Typically, the bad information remains on your credit report for roughly 7 years. That being said, it is entirely possible to improve your credit health, alter your spending habits for the better and get approved by creditors in the future. At Loans Canada, we like to say, “the great thing about bad credit is that it won’t always be bad”.
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