Credit Application Process

Credit approval is a risk assessment process.

The information you provide on a credit application tells a story about your ability to handle money. Whether you are looking to finance a home, a car or future purchases, a potential lender uses this information not only to assess your ability to repay, but to determine whether or not you will repay. While the information a lender asks for may differ depending on the loan type, the credit application process usually involves investigation, verification and assessment before your lender makes a final determination.

Credit Report

A lender usually starts the investigative process by getting copies of your credit report from bureaus such as TransUnion, Experian or Equifax. How many reports your lender requests depends on company policies as well as the type of loan. Credit card and auto loan agencies may request only one while mortgage lenders typically request all three. When looking at your credit report, a lender pays particular attention to your overall credit score, payment history, employment history and sources of income.

Verification

Unless your lender offers instant credit decisions, such as you might see with an online credit card or auto loan application, verification is the next step in the process. This is especially important for a mortgage application where your lender will verify almost every piece of information you provide. This includes employment information, such as employment length, and income verification and current balance verification on savings, checking and investment accounts. Because monthly rent payments are not usually part of your credit history, lenders will verify rent payment history if you currently rent. If you already have a mortgage, in addition to looking at mortgage payment information on your credit report, your lender may also verify payment history with your mortgage holder.

Assessment

The assessment process can be automated or manual. When the process is automatic, the assessment uses a type of credit scoring model that assigns a certain number of points to information, such as your credit history, length of employment, income and expenses. If you score enough points, the lender gives you on-the-spot credit. If not, either your application goes to further review or the lender denies you credit. When the assessment is manual, your lender considers factors in addition to credit scoring. For example, if you are applying for a mortgage, the home you choose must have a loan-to-value ratio of about 95 percent, and you must have mortgage insurance if your down payment is less than 20 percent. In addition, you must have the funds to cover closing costs before your lender can make a final determination on your credit request.

Considerations

Before filling out an application for credit, make sure your credit report is accurate and up-to-date. The Fair Credit Reporting Act mandates that each of the major credit bureaus must provide you with one free credit report each year via AnnualCreditReport.com or by calling 877-322-8228, so take advantage of this opportunity to correct any inaccuracies before you apply for credit and make the credit approval faster and easier for both you and your lender.

References

• "Personal Finance"; Thomas Garman and Raymond E. Forgue; 2008
• Federal Citizen Information Center: Your Credit Scores
• Federal Trade Commission: Understanding Vehicle Financing
• State Department Federal Credit Union: What Happens After You Apply
• Federal Trade Commission: Free Annual Credit Reports