When an individual or business needs more money than they currently have, it may be necessary to borrow. Borrowing money can be in the form of a secured or unsecured loan, line of credit, or credit cards. No matter the reason or method to borrow money, the lender almost always pulls a credit report to check out their credit rating, credit history, and current credit situation.
Credit history makes up most of an individual or business’s credit score. It’s the major factor lenders look at when considering an individual or business’s ability to borrow and repay the debt. Whether it’s getting a personal loan through a credit union or a business loan through LendingClub.com, the better the credit history, the more likely the application will be approved. It also can affect the terms of the loan, including the interest rate and amount.
Here are the major factors of credit history most lenders look at:
Have Payments Been Made on Time?
Lenders want to know that they can expect on-time payments for the loans that they offer, so a history of on-time payments is important because it shows the borrow is responsible to repay the debt as agreed. Credit history shows not only payments that have been made on time, but also if they were delinquent, how late were they. The later the payments, the less likely a lender is to offer credit at premium rates. Credit histories with zero late payments and proof of on-time payments show a borrower’s ability to repay the borrowed money.
Length of Credit History
Many people start out with good credit scores because the length of their credit history is too short to have allowed for negative actions. The longer accounts are open and being paid on time, the more proof of the individual’s ability to borrow and repay. Lenders what to know the borrower has been able to be consistent with good credit over a period of time. If a borrower has not consistently made payments on time, the length of time that has passed since the delinquent payments may put them into a positive light. For example, someone who missed several loan payments 5 years ago will be considered less risky than someone who is currently missing loan payments.
Some items are red flags in the eyes of a lender. These items include accounts sent to collections, charge offs, debt settlements, bankruptcies, foreclosures, wage garnishments, lawsuits, liens, and public judgments. All these items are viewed by lenders as clues they may not be paid back for any money that is loaned. Borrowers will have a hard time recovering from these events in the short term, but as time goes on, the borrower can return to making payments on time and taking steps to repair their credit history. As the negative events become older, the new credit history will show lenders that the individual or business is once again responsible for repaying debts as agreed.
To guarantee that a lender will approve a request to borrow money, it’s important to maintain a positive and healthy credit history. Borrowers should be diligent to follow a budget and be financially responsible to avoid the negative impact late payments, missed payments, and events like accounts going to collections will have on their ability to be approved for loans.