You always pay your bills on time and never miss any payments. However, lenders and credit card companies are rejecting you. What is going on?
Well, the truth is that your credit report is scaring away potential lenders.
Your credit report contains a lot of obvious information such as your ability to pay your bills on time. What you don’t know is that it also has other information that tells creditors to stay away.
Lenders know how to identify risk in their candidates through a series of policies and mandates. As conscientious as you are, certain things you do are red flags.
Where Do You Get Your Credit Report?
Credit reports and credit score are available from Equifax or TransUnion, Canada’s two credit reporting agencies. You can also view credit score and your credit report for free on Compare Hub.
Equifax and TransUnion collect information related to all your credit history and generate a credit report with your name on it. With Equifax and TransUnion, you can consult your reports for free every 12 months.
So what information is on your credit report? There is your personal information, employment history, consumer statement, account information, public records, and hard credit checks.
Learn how to get your credit score for free and consult your credit report with Compare Hub
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, lenders will do one of two things:
- Accept your application with unfavourable conditions including higher interest rates,
- Reject your application outright.
What Type Of Things On Your Credit Report Look RiskyTo Lenders?
Even though you pay your bills regularly and on time, there are still things that look risky to potential lenders. It comes down to frequency and timing.
Short Sale on your House
A short sale is when you sell your property at a loss compare to the outstanding debt on the asset. 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 assume that a short sale won’t impact their credit report when, in reality, it does. Your credit report shows the mortgage and short sale shows as closed or 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.
Read about the top 5 most common credit report errors.
Many Loan Applications In A Short Amount Of Time
If there are a lot of personal loan applications, request for 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 from credit cards are only used in emergencies 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 due to layoff or other reasons.
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 the 7 people who can check your credit?
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”.