In a NutshellCreditors look at a wide variety of factors, not just credit scores, to determine whom they approve and what terms they offer on a new account. Here’s some of the information they may consider.
Credit card issuers want to lend money. They want people to have and use their cards, and lenders want people to take out and repay loans.
Collecting interest and fees are two ways that creditors make money. But they don’t want to lend money to someone who won’t pay it back — that will result in losing money. So how do creditors determine who to approve for a loan or credit card?
Underwriting is the process a company uses to decide which applicants to accept or deny and what terms to offer on its loans. In other words, it is the process of determining if an applicant is creditworthy.
“A typical credit-underwriting process is going to do a prescreen qualification check,” says Duane Good, managing partner at RiskThought, a risk-management advisory firm. “It could be a variety of checks to make sure the applicant qualifies, such as a citizenship or address check. Then, there may be a bureau check and cash flow analysis.”
The underwriting process can vary depending on the financial institution and product, but many creditors gather and analyze data from a variety of sources before making a decision.
Information from your application
When you submit an application for a credit card or loan, you provide creditors with a variety of information, such as your name, address, annual income, whether you rent or own a home, and your monthly home payment. Creditors can use this data to help verify your identity and pull your credit reports. They may plug the information into custom scoring models, too.
Some of these metrics are well-known indicators of creditworthiness. For example, a creditor could compare your income to your monthly debt obligations from your credit reports and your monthly housing payment to determine your debt-to-income ratio, or DTI. This ratio could help it decide how much additional debt you can afford to take on.
If the lender requires you to share information about your current savings or retirement account balances, it may also consider whether you could use those funds to repay a loan.
If you’re applying for a secured loan, like an auto loan or mortgage, the lender will also consider information about the property you’re using as collateral. The make, model and mileage on the vehicle, or the appraised value of a home, could be important factors in determining whether you will get the loan.
Many companies use a credit score or scores to help evaluate an applicant, and some may require that you have credit scores above a certain point to qualify for the credit card or loan you’re applying for.
Companies can use credit scores, such as FICO or VantageScore credit scores, along with your credit reports. Or a company could use an internal scoring model, says Naeem Siddiqi, director of credit scoring at SAS and author of several books on the topic.
“If you qualify based on the internal score, the company may be able to save money by avoiding having to buy a generic score,” he says.
Some creditors may also use a mix of custom and generic scores. But smaller financial institutions tend to rely on generic models.
“It ends up being cheaper,” says Siddiqi. “They don’t have the [lending] volume to justify hiring people to build models, while mid-to-large lenders almost always build their own models in-house due to the significant return on investment.”
Mortgage lending is a special case, and most mortgage lenders use specific versions of FICO® scoring models when underwriting a mortgage.
Credit bureau data
Your credit reports contain information about your history with loans, credit cards and credit lines.
Creditors may use information directly from your credit reports to determine your creditworthiness, such as using your current monthly obligations to determine your DTI. Your credit reports could also indirectly impact your application because most generic credit scores are based entirely on the information in your credit reports. However, some bureaus are starting to look at nontraditional data as well.
Even if a creditor uses a custom scoring model, “those almost always incorporate credit bureau data in them, such as your inquiries, [accounts] and delinquency history,” says Siddiqi.
Some companies are starting to use other types of financial information that people are sharing with the company during the application process.
One example is Petal, a credit card company that doesn’t require applicants to have credit scores, or even a credit report, to qualify. (Though if you do have a credit report, it may consider that information, too.)
To apply for the Petal® 2 Visa® Credit Card, you can connect your checking, savings and credit accounts to Petal. Petal will then analyze your information to determine if you qualify for the card and if so, your card’s terms.
By getting access to your bank accounts, companies like Petal can look for insights and trends in your account history, like whether you regularly save money, your average savings balance and how much money flows into and out of your account each month.
FICO has announced a new scoring model, UltraFICO™ Score, which also lets you connect your bank accounts and considers that financial information when determining your score.
There isn’t a universal definition of creditworthy — your likelihood of being approved depends on the specific creditor and the financial product. Your creditworthiness could even depend on when you apply, as creditors may loosen or restrict their requirements to meet different goals. You may not be able to get insight into the exact requirements of the product you’re applying for. But knowing what information creditors consider could help you figure out how to improve your chances of getting approved for a new account with favorable terms.