Ever wonder what it’s like to look at your credit or loan application from the other side of the desk?
When lenders look at your credit report, “it’s really about common-sense decisions,” says Rod Griffin, senior director of consumer education for Experian, one of the three major credit bureaus.
“Creditors and lenders really find boring to be exciting and sexy,” he says. “Anything unusual is scary.”
When you apply for a loan or a credit card, lenders very often check your credit score, your credit report, or both. If they don’t like what they see, you’ll be rejected—or approved, but with less-favorable terms.
And it isn’t just new applicants who are scrutinized. Credit card issuers, for example, periodically review their customers’ files, too.
If you want the best deals and terms, here are seven items you—and your lenders—don’t want to see.
1. Late or missed payments
This one cuts to the heart of what lenders really want to know: “Are you going to pay your bills?” says Francis Creighton, president and CEO of the Credit Data Industry Association, the member organization for credit bureaus.
What you might not realize: Anything other than timely, minimum payments are seen by creditors and lenders as missed payments.
“What matters is that you’re making the payment by the due date,” says Griffin. “If you only make a partial payment—as related to minimum payment due—that’s a bad sign. A partial payment is a late payment.”
When it comes to your credit score, making timely payments is the most important factor. It counts for 35 percent of your credit score.
2. Foreclosures and bankruptcies
These are the two worst items you can have on your credit history—and both will give future lenders pause, says Griffin.
So just how would these events make a lender feel about extending credit?
“Somewhere between quite frightened and terrified,” he says. “Especially if it’s recent.”
Seeing these items on your history “doesn’t mean they won’t make that loan,” says Creighton. “But they may price it differently.”
Foreclosures stay on your credit report for seven years. Chapter 7 bankruptcies—total liquidation—remain on your credit report for 10 years. Chapter 13 bankruptcies—where consumers reorganize to repay some or all of their debts—stay in your credit history for seven years.
If you had a short sale, you won’t find those exact words on your credit report, says Griffin. Instead, it will say “settled” or “settled for less than originally agreed.”
Like foreclosures, short sales also stay in your credit history for seven years. And it’s seen by creditors as “better than foreclosure by a little bit,” he says.
That said, the farther in the past that a foreclosure, bankruptcy or short sale occurred—and the more the consumer has recovered financially—the less impact it will have on their credit, says Griffin.
3. High balances and maxed out cards
“A high balance, as compared to the credit limit on your cards, is the second most important factor on your credit score,” says Griffin.
Just how much of your credit you’re using comprises about 30 percent of your score.
And high balances or maxed-out cards are “an indication of financial difficulty,” he says. “Ideally, you would pay off your card in full every month and keep your utilization as low as possible. What we see is the people with the best score have a utilization ratio [the balance divided by the credit limit], of 10 percent or less.”
And that’s for both individual cards and the consumer’s collective total of credit lines and card balances, he adds.
One credit score rule-of-thumb used to be to keep the utilization ratio below 30 percent. “But 30 percent is the max, not a goal,” warns Griffin. “That’s the cliff. If you go beyond that, scores will drop precipitously.” Conversely, the “further below 30 percent you are, the less likely you will default,” he adds.
Tip: As your utilization ratio changes from month to month, so will your score.
Griffin remembers one holiday family vacation where he put everything—travel, meals, gifts—on plastic. His utilization ratio went up 7 percent, and his credit score dropped 40 points.
In January, he paid the card bills in full, and his score returned to normal. “So don’t panic about that if your score is good,” Griffin says.
4. Someone else’s debt
When you co-sign a credit card or a loan, the entire debt goes on your credit report. So, as far as lenders are concerned, you’re carrying that debt yourself, and it will be included in your debt load when you apply for a mortgage, credit card or any other form of credit, says John Ulzheimer, a former credit industry executive and president of The Ulzheimer Group.
If the person you co-signed for stops paying, misses payments or pays late, that likely will be reflected on your credit report.
So if a friend or family member who needs a co-signer tells you that it’s painless because you’ll never have to part with a dime, tell them that’s not true. Co-signing means agreeing to repay the obligation if the borrower defaults and allowing that debt, and any late or nonpayments, to count against you the next time you apply for a loan.
Co-signing for a friend or family member plays well at the Thanksgiving table, says Ulzheimer, “but it doesn’t play well in the underwriting office.”
5. A history of minimum payments
Creditors make money when you carry a balance, but lenders don’t like to see only minimum payments on your credit report.
“It suggests you may be under financial stress,” says Nessa Feddis, senior vice president of the American Bankers Association. “You may be at higher risk of defaulting.”
Occasionally paying the minimum doesn’t signal a problem. For instance, paying minimums in January, after holiday spending, is understandable. But consistently paying minimums month after month indicates you might be having trouble paying off the balance. Lenders who see that on a credit report may be reluctant to grant additional credit.
6. A flurry of loan applications
This one won’t so much scare lenders as cause them to take a second look at what’s going on in your financial life, says Griffin.
For someone who’s paying all their bills on time and not carrying balances, a burst of applications could be perfectly innocuous. But for someone who’s making minimum payments or late payments, and transferring balances, it’s a sign of financial stress—and a turnoff to lenders.
“Inquiries suggest something to lenders,” says Creighton. “And that’s valuable information.”
Hard inquiries for new credit stay on your credit report for two years and affect your credit score for a year. In the FICO scoring model, new credit counts for 10 percent of the score.
“They are the least important factor in credit scores, and the last thing that creditors are going to look at,” says Griffin.
Tip: Some types of credit applications—for mortgages, car loans or student loans—are grouped together and counted as one inquiry by credit scoring formulas. That’s because when it comes to those large purchases, lenders know you’ll want to shop around—and that’s smart.
While newer scoring formulas group similar loan inquiries together if they’re made within 45 days, older versions only have a 14-day window. And you have no way of knowing which version potential lenders are using. To be safe, keep all inquiries within 14 days.
7. Cash advances on a credit card
“Cash advances, in many cases, indicate desperation,” Ulzheimer says. “Either you’ve lost your job or are underemployed. Nobody takes out cash advances against a credit card because they want money sitting in a bank somewhere. You’re generally borrowing from Peter to pay Paul.”
Here’s how a cash advance will send up a red flag for lenders looking at your credit report: First, the cash advance is immediately added to your debt balance, which lowers your available credit and your credit score for all potential lenders to see.
Second, larger card issuers regularly re-evaluate their customers’ behavior. To do that they pull credit reports, FICO scores and customer account histories and run those through their own credit-scoring systems, Ulzheimer says. Many of the scoring models penalize for cash advances because they are considered risky, he says.
If the card issuer reduces your credit limit or cancels your account, that can damage your credit score—and make other lenders warier.