In tough economic times, lenders are more cautious about loaning money to borrowers who may not be able to pay them back. The credit report is the primary way lenders separate the sheep from the goats in determining which borrowers are financially healthy and trustworthy. A credit report reflects open credit lines, debt levels and payment histories.
Tightened lending requirements cause lenders to thoroughly scrutinize credit reports. While many report items may be ignored, certain issues give lenders pause and can even lead to an outright denial of a loan or credit application. Some of those issues include:
- Multiple lines of credit in a short time period
- Short sale of a home
- Co-signed debt
- Making only minimum payments
- Cash advances
Multiple lines of credit: Requesting multiple lines of credit in a short time frame screams personal financial crisis. It says the borrower needs money fast and that any new lenders will have to wait in line behind the other creditors to get paid (if ever). That is a risk most lenders are not willing to take.
Short sales: Short-selling a home is widely seen as a smart way to avoid default and walk away from a bad debt situation. However, a short sale is a negotiated payment of a percentage of the full debt. The difference between what one pays and should have paid is reflected as an unpaid balance on a credit report.
Co-signed debt: Co-signing a loan is riskier than most people realize. Not only does the full loan amount appear on the co-signer's credit report, but so do any missed payments or defaults by the other person. Co-signing can reduce one's credit score and available credit because of the additional risk.
Making only minimum payments: By consistently making only the minimum required debt payments, a borrower signals an inability to pay the full debt. The message to lenders is that the borrower is financially stretched and cannot handle additional credit.
Cash advances: Cash advances usually show a need for quick money to pay down other debts. The advance counts as debt and signals to lenders an inability to pay current debts without incurring more debt. The bottom line is that a cash advance increases debt and riskiness, resulting in lower available credit.
With these caveats in mind, borrowers can work to avoid subtle pitfalls that may undermine their ability to get additional credit. Lending requirements are already tight — no need to make it harder by appearing financially untrustworthy.
