Getting a credit card is easier than it was two years ago, but other lending standards are still quite high. One change that has taken place among lenders since the economy derailed in 2008 is that lenders are looking at more than just your credit score when you apply for a loan.
This new approach to lending is a double-edged sword.
For those with good, steady incomes, but a relatively short credit history, the new approach can be beneficial. However those with great credit scores who have low income or are self-employed (or who work on commission) could have a harder time getting a loan now.
Lenders now look at information beyond what is collected by the three main credit bureaus. They now consider your job history, income, and net worth more when making lending decisions, and credit agencies now offer personal information beyond credit scores to lenders who want the information.
All consumers will notice that more documentation is now required for loans, partly due to backlash from the excesses of lending that preceded the economic crash. Therefore, it is more important than ever to look at your credit reports every year (or more often in some cases) to identify and correct mistakes on them.
According to a 2009 report by the National Consumer Law Center, anywhere from 3% to 25% of credit reports contain serious errors.
While credit scores the number grade assigned by credit bureaus are arrived at from information on payment history, outstanding debt, types of credit used, and length of creditworthiness, they are not always good predictors of risk. After unemployment rates soared from around 4.5% to 10.5%, lenders realized that past behavior couldnt always accurately indicate future behavior.
People who worked in sectors that boomed during the housing boom and crashed in the recession (such as construction and real estate) could have a harder time getting credit, as could those in sales or self-employed people whose income may be unpredictable.
Thats why lenders are now putting more weight on job history, income, and net worth. Lenders obtain some of this information from data gathering entities, while some of it comes from public records or from information that borrowers authorize their employers to release.
What can you do to give yourself the best chance of getting that mortgage or loan on the best terms?
- Pay bills on time, and keep your rate of credit utilization low
- Check your credit reports from all three major bureaus. You can get a free copy of each once a year from AnnualCreditReport.com.
- Boost your savings, particularly if you are self-employed. Being able to make a larger down payment will help your chances, as will a consistent history of savings.
- Pay down or pay off credit cards, but dont close them out.
- If you are self-employed, or a contract worker, be prepared to show that you have a history of regular employment and clients who pay on time.