Keys to Obtaining Credit: Qualifying and Applying for Credit

Qualifying for credit is an art. It is important that you know what you are getting yourself into before you complete a loan application. You need to know what the credit grantor is looking for to get an approval. You also need to know what type of credit and terms you are applying for. Too often individuals are shocked when they are issued credit and the terms are different from what they thought.

Before applying for any line of credit, do your homework. Read the fine print on the loan application. Screen the bank, savings and loan companies, or credit unions before applying for credit cards. The differences in interest rates, loan fees, annual fees, late fees, and payment requirements can be vast.

Interest rates can be calculated on a daily basis (interest charges start accumulating when a purchase or charge is made), or on a pro-rated basis (no interest is charged until a balance remains in a new billing cycle, which usually includes a 25-day grace period).

Daily we are inundated with questions from callers and clients who are facing difficult situations and need answers today. We have been on several hundred radio and television talk shows where the telephone lines are jammed with individuals seeking answers to their problems.

This web site is a compilation of questions that we have been asked either on the radio, TV or at our office. The stories that we share with you in are true (the names have been changed). We have discovered that everyone has a story. Some problem details may be different from yours, but frequently the solution is the same.

A credit grantor will review the length of your employment, your previous credit, whether you own or rent your home, if you have a checking and savings account, and your credit rating before making a decision to approve (or not) your application. Using the information you give on your credit application, the credit grantor will assign a certain number of points to each category. This will give you a credit score. The scoring is discussed later in this section. If the score is high enough, and your credit re port is satisfactory, your application will be approved. Each company has its own credit criteria.

Be selective on whom you give your information to. Do not give any information to anyone over the telephone unless you have verified his or her legitimacy.

True Story: It Happened To Our Staff Member! Here’s her story…

Several years ago my husband, John, and I decided to lease a car. We were undecided on which car we wanted. One afternoon I over heard John talking to someone on the telephone. He was giving the individual on the telephone his name, address, and Social Security number. I quickly started flagging him not to give that information out. It was too late. Hal said the person asking for the information needed it for their records in order to find us a car. Subsequently, we decided to delay getting a car until a later date.

Several months later I requested a copy of our credit report from one of the major credit reporting agencies. As I was reviewing the credit report I discovered four inquiries from banks that were never authorized by either John or me. Knowing what I did about unauthorized inquiries. I called the individual whom Hal had spoken with regarding the car and asked who gave their company authorization to run our credit report? I quickly informed the company that I knew my rights under the Fair Credit Reporting Act and that they ran a credit report without our written or verbal authorization. I gave them 14 days to remove these inquiries from our credit report. This individual started to stammer and said he didn’t know how he could get the lenders to remove the inquiries as his company gave the lenders permission. It didn’t matter to me how they removed it; I knew my rights. All four of the inquiries were removed within the 14 days.

Excessive inquiries within a six month period will cause many applications to be denied.

The moral of this story is to never give out your name, address, or Social Security number to anyone unless you know what they intend to do with it and they are a reputable company.

Stability

Q. What qualifications must I have to get a line of credit?

A creditor is looking for the three Cs of credit: capacity, character, and collateral.

The capacity to pay is determined by your employment as well as the length of time you have been employed. Creditors want to know about your income, bonuses, and any commissions you may receive. Included with capacity are your expenses and how many dependents you have. Creditors then determine how much you can afford to borrow or how high a credit limit you can qualify for.

The credit grantor evaluates your character by reviewing your credit history and paying habits. It gets this information from Experian (TRW), Trans Union, and/or Equifax credit reports. These are the three major credit reporting agencies. Also reviewed is the length of time you have lived at your current address. If you have been at your current address less than two years, you will be asked to list your previous address. If you move frequently, you may not appear stable. The status of owning or renting your home is also reviewed.

When a credit grantor is reviewing your collateral it wants to see what assets you have other than your income. Assets could be viewed as a savings account, investments, and property you own.

The more stable you appear, the better the chances of an approval on your application.

Employment

Q. What type of employment history is a credit grantor looking for? I have been employed at my present job for 1 1/2 years.

The credit grantor is looking for at least two years of employment at your current job. If you have been at your present job less than two years, you will need to supply your employer’s name, your position or title, your line of work, and the dates of your current and previous employment. If you have no time lapses in your employment history and your line of work has not changed, you have a chance of a loan approval providing all other qualifying factors are good.

If you had a lapse of time between jobs, the credit grantor may not approve your credit application.

Another thing a credit grantor is looking for is the number of years you have been employed in your current line of work. If you have changed your line of work and have worked in your new field less than two years, you may not be approved.

Credit Reports

Q. When a credit grantor reviews my credit report, what is it looking for?

A credit report tells a complete story of your paying habits, how much you owe, if you are overextended on your accounts, and what your balances are. It also will reveal your current address, previous address, and occasionally your employer.

A credit grantor is making sure you have revealed all the pertinent in formation you have listed in your loan application. If there is any derogatory information listed in your credit report such as charge-offs, collection accounts, slow payments, delinquent payments, tax liens, judgments, or bankruptcies, your application may be denied or further explanations may be required.

Always get a copy of your credit report before you apply for credit. There may be errors you need to correct before proceeding with your application. An incorrect report may result in your application being denied.

Credit Scores

Q. How does a credit score affect my qualification for credit?

If a credit grantor subscribes to each of the credit reporting agencies, it can have access to a special credit scoring system that the credit reporting agencies reveal in their analyses of your credit reports. This is known as a FICO score. A score can range from 0 to 900 points. Using a combination of factors, the FICO score will reveal if you are deemed creditworthy. For example, suppose you are in the market for a new car. The car dealer would request a copy of your credit report from a credit reporting agency. It will reveal your paying habits and FICO score. If you have a FICO score of 700 points you would be automatically approved for your car loan with out having to supply any further documentation. If your FICO score falls below 700 points, the dealer may require more documentation from you to get the loan approved.

Whether for a car loan, mortgage, or credit card, each lender has its own criteria in determining what FICO score you should have. In addition to the FICO score, if there is any derogatory information on your credit report, you will be asked for an explanation. If your debts are too high when added to the new purchase or line of credit, your application may be denied.

As an individual, you can’t get a copy of your FICO score from the credit reporting agencies; this is only provided to the business subscribers. If you want to know what your FICO score is, you must apply for credit through a mortgage company, auto dealer, or merchant that subscribes to this service. These companies are under no obligation to reveal the score to you, however many will upon your request.

Another way a credit grantor evaluates your application with scoring is by assigning a certain amount of points to specific categories. For example points would be assigned for the following: marital status, number o dependents, whether you own or rent your home, years of employment credit history, monthly obligations, age, years at your current residence, years at your previous residence, occupation, monthly income, and other factors. The points are totaled. If you fall within their range, you will be approved.

Bank Accounts

Q. Do I have to have a checking or savings account in order to get credit?

A creditor wants to feel secure knowing that you have money in a bank account, especially as you need to make payments with a check or direct withdrawal system.

You don’t necessarily need to have both a checking and savings account. However, you are rated higher with the credit scoring in qualifying Lf you have both. Be sure to list the name, address, and account numbers n the application whenever asked. Specify which account is the checking and which is the savings account.

Low-Interest Credit Cards

Q. Is a low-interest rate cards hard to qualify for?

Yes. A low interest rate card requires that you have a good payment history, with no derogatory information, and that you are not overextended. The creditor will look at your job stability and income and the length of time you have lived at your current address.

Before applying for a low interest rate credit card, call the credit processing department and find out what the creditor’s criteria is for qualification. Find out what credit reports they run.

Prior to applying, get a copy of your credit report from all three credit reporting agencies: Experian (TRW), Trans Union, and Equifax.

If you know prior to making an application to the creditor that you fit the criteria the creditors are looking for, then follow through with the application. If you don’t fit the criteria, make whatever improvements are necessary and apply at a later date.

Rent or Own

Q. Does it matter when applying for credit if I rent or own my home?

A credit card company will look more favorably at your application if you own your home. However, if you rent it will look at how long you have lived at your current residence. If you move frequently, your application will be denied. A creditor will look at your past two years of residency. Some creditors may look as far back as five years. If the credit grantor feels you are stable—regardless of renting or owning your home, the application will be approved.

The credit grantor wants to feel secure that should you not make your payments, it has a means of collecting the debt. Most credit cards are unsecured. In some states, a creditor’s only recourse to collect the debt is to get a judgment against you which would secure the payment with your home when you either sell or refinance the property.

If you are applying for a mortgage, a lender will look at your credit history and how long you have lived at your present address. The creditor will verify length of residence through your landlord or mortgage lender. Whether or not you pay your rent or mortgage on time is reviewed closely because it may indicate how you will pay your new loan.

If you are trying to rent a home or an apartment, a credit report may be requested. If there are problems listed on your report, the landlord may in crease the required deposit.

If you are upfront about any credit problems, many creditors will work’ with you or show you what to do to reapply in the future.

Interest Rates

Q. How is my loan interest rate calculated? Why do some of my credit cards offer a grace period, while others do not?

Before completing a credit application, read the disclosure of terms located somewhere in the application. The disclosure of terms will list the annual percentage rate (APR). For example, your APR may be 21 percent. To figure out the total cost of a loan in dollars, multiply the monthly payments by the total number of months of the loan. From the total payments subtract the total amount borrowed to see how much you are paying in interest.

For a credit card, some creditors calculate interest on a daily basis. That means that interest charges begin to accumulate as soon as a purchase or charge is made. Other creditors calculate interest on a pro-rated basis, giving you a grace period. That means no interest is charged until the billing cycle. The grace period could be 25 to 30 days from the purchase date. You can repay the amount you charged in full during the grace period with interest charged.

The best cards to use would be those that have a grace period. You get free use of the money during the 25 to 30 days before the statement is due. The way to take full advantage of this form of payment is to pay the total balance off each month.

Always review your credit card application to see what the cost will be. If there is no grace period I would suggest you look for another creditor who offers one.

Next: Credit Denials

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