Do Your Credit Reports Contain These Three Red Flags?
But what about those of you who have decent credit ratings, or maybe even good credit? A solid FICO score alone frequently isn't enough to get a loan application approved, especially if other items on your application are sending up warning signs to a lender.
Here are three red flags – on your credit reports and elsewhere – that could cause lenders to think twice about extending you credit.
1. Too many credit card accounts
What's the "ideal" number of credit cards you should carry? Frankly, no one knows. It all depends on what a lender is looking for. It's one thing to have a good mix of credit and an adequate number of credit cards from the standpoint of the FICO scoring system or another credit scoring model such as the VantageScore.
But it's another thing entirely to fit a lender's profile of an ideal customer. Banks often use their own customized, credit-scoring software. Additionally, they may judge your request for credit based on your overall "application score."
Whereas a FICO score focuses on elements like your payment history and outstanding debt balances, your application score will assess everything you state on your credit application, from how long you've lived at your current address to your income to the length of time you've been at your present job. None of these are factors included in your FICO score.
Of course, if you're trying to get approved for a credit card application and you've already got a wallet full of plastic, don't be surprised if you get denied on the basis that you already have "sufficient" credit. Sufficient to some banks means you have enough cards. Sufficient to other banks means you have enough credit in terms of your credit limits.
Either way, since lender guidelines vary based on each institution's risk appetite, it's not uncommon for a person deemed to have "sufficient" or "too much credit" by one firm to be judged as a perfectly safe lending risk by another firm.
2. Having a 100-word "Consumer Statement"
If you had a financial problem in the past – say you were downsized or went through a nasty divorce – you certainly wouldn't be the first person to have fallen behind on your bills during such an ordeal. (See this article on how to bounce back from bankruptcy).
If you later tried to clean up your credit, you may have been advised to add a 100-word "Consumer Statement" to your credit reports. Individuals use such statements to refute late payments, offer their side of disputed credit accounts or to generally explain to potential creditors, employers and others why something negative is present in the credit reports.
Even though the Fair Credit Reporting Act gives you the right to add a Consumer Statement to your credit reports, doing so is typically a mistake and can be a turnoff to lenders. Will a Consumer Statement cause a lender to kick your mortgage application into the rejection heap? Not likely.
Still, no matter what carefully crafted explanation you come up with, you run the risk of looking like a bad credit risk to a lender. And if you do have a borderline application and an underwriter has to review your home loan request manually, you don't want to give that person any reason not to give you the benefit of the doubt.
At best, by "explaining" what happened, a Consumer Statement lumps you in with scores of other consumers who are offering justifications – from the legitimate to the completely ridiculous – about why they have a damaged credit rating. At worst, a Consumer Statement can make you look financially irresponsible and guilty of whatever infraction(s) your creditor(s) said you committed.
Another downside: Unless you ask for it to be deleted, a Consumer Statement will remain on your credit reports for 10 long years. Read more of my advice on why it's best to avoid adding a Consumer Statement to your credit reports – and how to get rid of that statement if you've got one.
3. Evidence of recent credit shopping
Whenever you apply for credit, some institution will pull your credit report – and maybe even a "tri-merged" credit report – to check out how you've handled your financial affairs. Those reviews of your credit status result in "hard inquiries," which stay on your credit reports for two years.
Even if you're up-to-date with all your bills, if you've recently been shopping around for credit and allowing numerous banks or other entities to peek at your credit rating, that could hurt your chances of winning a "Yes" from the lender of your choice. (See these 5 surprising things that hurt your credit scores).
First of all, all those inquiries could lower your credit scores, jeopardizing your loan application. Additionally, some lenders may ask you to explain your recent behavior. Just because a recent inquiry shows up on your credit report, another lender has no immediate way of knowing:
a) whether or not you were approved for credit; and
b) whether or nor you accepted that credit or loan offer.
So a prudent lender that sees a relatively recent inquiry will want to know whether or not you took on new credit obligations that may not yet be showing up in your Equifax, Experian or TransUnion credit reports. Before approving a mortgage, a lender may even ask you to attest, in writing, that you've not racked up any other debts than what now appears on your credit reports.
All of these red flags serve as reminders to manage your credit and debt wisely. This way, when you're in the market for a loan, you'll get the best rates and terms available.
You also won't have to jump through all sorts of hoops explaining what could be viewed – at least from a lender's perspective – as red flags in your credit reports.