A credit report is an important prequalification tool for businesses that rely on consumer financing. To get more customers financed successfully, it is vital to prequalify a customer.
It’s important to have a good understanding of how lenders look at credit scores and reports. This can be accomplished by simply getting the answers to some basic questions. Ask questions like:
- What does a lender look for when they finance a loan?
- What do they like to see in terms of credit scores?
- Do they prefer an industry-specific credit score model?
- Do they prefer a credit report from a particular bureau?
- What are the debt-to-income ratios they’re looking for?
Credit scoring has become the primary means of assessing a consumer’s creditworthiness in most consumer finance industries. Credit scores are calculated based on mathematical equations developed by Fair Isaac Corporation. These score models are commonly known as FICO® scores. FICO is the most popular scoring model used among lenders and creditors to calculate a consumer’s credit risk. By comparing this information to the patterns found in thousands of past credit reports, scoring estimates the level of risk a lender or creditor is assuming.
Credit scores are most useful when used in combination with the total credit history. While a credit score allows for a quick evaluation of a customer’s creditworthiness, the information in the credit report itself may provide valuable insight that can help you close the deal.
Some credit reports provide a summary section for at-a-glance assessment. The summary will give you quick information about the customer’s payment history, available credit, and public record information, such as bankruptcies. The summary is a great way to get a quick snapshot of a customer’s credit history and can save you from having to weed through the details of every tradeline in their credit file.
Pay extra attention to bankruptcies. Many lenders will not even consider financing a customer with a bankruptcy that’s less than two years old. A particular lender may be more inclined to approve a loan with this type of customer than others.
A customer that has extensive credit history is considered less risky due to the amount of data available on their credit record. The evaluation of over 30-years of payment habits and debt repayment practices is more dependable than only 3-years of credit history. Bottom line; the less credit history a customer has, the higher the financial risk – and the higher the interest rates on their loan.
A customer that has balances of more than 50% of the credit line is a red flag to lenders. It is often an indication that the customer may be living beyond their means.
If a customer has late payments or collections on their credit report, there could be reasons behind the delinquencies that will impact your lenders’ financing decisions. Interview your customer to gather details that might play in the customer’s favor. Was this person laid off from work or on disability during this period?
The most important period to look for in terms of a customer’s credit history is the last six months to two years. Lenders look very hard at the recent past, and if there are delinquencies within this period, it will have more of an impact than five-year-old delinquencies.
In the end, the ability to efficiently assess a customer’s creditworthiness in terms of the lender's criteria can help you to effectively match the two together. Once you’ve made the perfect match, you have a satisfied lender, an improved closing ratio, and a happy customer.