The Credit Approval Process & What to Expect

Here is a closer look at the approval process for credit cards, loans and mortgages.

Credit Cards

The fastest way to get approved for a credit card is to apply online. Many issuers offer instant approval to online applications. So you may know whether you have been approved for a credit card within minutes of applying. You can also apply by mail or phone. Once approved, it is likely a credit card will be sent to the mailing address that you listed on your card application within 10 business days. And if you need the card in a hurry, you can pay a fee for the expedited delivery of your credit card. If you are turned down for a credit card, an issuer will send you a letter explaining why you did not qualify for the credit card.

Loans

Applying for a car loan or personal loan is an easy process, with many lenders offering online applications. And you can find out if you are likely to be approved before you apply by asking about minimum credit standards required for the loan. Some lenders list credit qualifications, such as minimum credit scores, right on their websites.How quickly you are approved for a loan depends on the lender. But you may receive your approval within 24 hours or even within the hour. If you are turned down for a loan, a lender will send you a letter explaining why you did not qualify.

Mortgages

Getting pre-approved for a mortgage will speed along the homebuying process. After you complete the pre-approval process, you may be asked to supply some additional supporting documents. Once all the necessary documents are submitted and reviewed you will receive one of four possible decisions on your home loan — approved, approved with conditions, denied or suspended.

If your loan application is suspended it means more documentation is required before a lending decision can be made. If your loan application is approved with conditions, there are specific criteria that you must meet before you will receive the full approval of your loan. And if your mortgage application is denied, you will receive a notice in writing explaining the reasons why.

The best way to take the surprise out of a credit application is to check your credit score before applying. 

What is the Average Credit Score?

If you’re wondering what the average credit score is, you’re probably really wondering how your credit score compares to others. You may also be wondering if it’s good enough to get approved for a loan or a credit account.

While the average credit score sounds like a simple enough figure to pin down, it’s a little more complicated than you may realize.

What’s My Score?

First things first. If you want to know how strong your credit is, you’ll need to know your credit score. You can find out by using www.creditchecktotal.com.

Which Score?

Another thing you’ll need to know when comparing your number to others is which credit score model is being used to calculate the score, and what credit score range is being used.

There are many different credit score models, including versions of VantageScore, FICO scores and even educational credit scores. Some of these have different credit score ranges, so while VantageScore 3.0 and FICO scores run from 300 – 850, there are others that run from 501-990 or 360 – 840, for example.

What’s A Good Score?

Again, different models have different ranges, and lenders make their own decisions about what they consider acceptable. But here’s an example using the ranges from Credit.com’s credit card comparison tool:

• Excellent Credit: 781 – 850
• Good Credit: 661-780
• Fair Credit: 601-660
• Poor Credit: 501-600
• Bad Credit: below 500

Again, what’s considered a good or fair credit score will depend on how the lender views it, but you can get an idea of how lenders are likely to view your applications by checking your score and seeing how it compares to others.

Average Credit Score

Still hoping to find some numbers?

As of the 2nd quarter of 2013, the average VantageScore for consumers with an existing auto loan and lease was 761; for those with a bankcard it was 796 and for those with a mortgage it was 819. (This is using the classic version of the VantageScore which runs on a scale from 501-990. Data from Experian’s IntelliView tool.)

As of October 2012, the average FICO score is 689 according to MyFICO.com.

Does Closing a Credit Card Affect Your Credit Score? Find Out Before it’s Too Late

Thinking about cleaning up your credit report by closing a credit card account that you haven’t used for years?

Think again.

Closing a credit card account lowers your credit score by slashing some of the length of your credit history and reducing your available credit.

Credit utilization is an important component of your credit score. So in terms of your credit score, closing credit card accounts that you don’t use is one of the biggest mistakes you can make.

Why Closing a Credit Card Account Hurts Your Credit History

Positive credit information, such as a long-established credit card account with a positive payment history, may stay on your credit report indefinitely. But when you close an account, it is usually removed from your credit report within 10 years.

Once that account is wiped from your credit report, you lose the credit history associated with the account and because the length of your credit history accounts for about 15 percent of a FICO score, your credit score takes a hit.

So do your credit score a favor and keep old credit card accounts open.

Why Closing an Account Hurts ‘Credit Utilization’

The amount of revolving credit card limits that you are currently using is called your “revolving utilization.” Let’s say you have a credit card with a $10,000 limit and a $2,000 balance. You are utilizing 20 percent of your credit line.

This measurement, also known as “debt-to-limit ratio” or “credit utilization,” makes up about 30 percent of your credit score. It measures each of your individual revolving credit card accounts plus the total credit limits and balances of all your revolving accounts on your credit report.

To maximize your credit scores, you’ll want your revolving utilization to be as low as possible, with 10 percent, or lower, being ideal for most people.

An open credit line with a roomy credit limit and zero balance will help to lower your revolving utilization, when you carry balances on other accounts.

So keep your revolving utilization low by keeping old accounts open and balances low.

3 Things Bankruptcy Does to Your Credit Score

Filing bankruptcy hurts your credit score in some big ways. Here are a few you should keep in mind before deciding to file for bankruptcy.

Bankruptcy Causes Your Credit Score to Plummet

There is no way to underestimate the impact a bankruptcy has on your credit scores. It is one of the worst things you can do to your scores. A bankruptcy can make your credit scores plummet by 200 points or more.

A Bankruptcy on your Credit Report Causes Long-Term Damage

Having bankruptcy information listed on your credit report will impact your credit for years.

The public record of a Chapter 7 bankruptcy stays on your credit report for 10 years.

Any other bankruptcy references remain in your credit file for seven years including:

• Chapter 13 public record items
• Any accounts included in a bankruptcy
• Third-party collection debts, judgements and tax liens discharged through a bankruptcy

The Negative Impact on your Credit Diminishes Over Time

When rebuilding your credit after a bankruptcy, remember that time is on your side. Bankruptcy information will be considered in your credit scores for as long as it appears on your credit report, but its impact on your score lessens over time.

The newer the bankruptcy information the more powerful the impact it has on your credit scores. A year (or two or three) after the date a bankruptcy first appears on your credit report, its impact will shrink until eventually, the bankruptcy information is removed from your credit report altogether and is no longer a factor in your credit scores.

You can monitor your progress in rebuilding your credit after bankruptcy with www.creditchecktotal.com It updates your credit scores every month so you can track your improvement and see how your credit score inches up afterwards.

To rehabilitate your credit after a bankruptcy, build a positive credit history with BANCO Financial credit restoration and by using secured credit cards and installment loans and make on-time payments on all credit and loan accounts.

How Your Cellphone Can Help You Build Credit

Mobile alerts from your credit card issuer can do much more than alert you to possible fraud. You can use that information to help you improve your credit.

First, a word about how credit scores work. The two biggest factors are paying on time(35%) and the amount of credit you use relative to your credit limit (30%).

And mobile alerts can help you with both, by reminding you when your payment is due (you can choose the number of days in advance; some default to five) and when you are approaching your credit limit.

If you are certain there will be enough money in your checking account to cover it, you can automate the payment to be sure you will never be late with a payment. Whether you do this or not, it’s smart to go over your statement carefully, looking for any charges you don’t recognize. Those could suggest fraud and should be investigated. Identity theft experts recommend you check your accounts every day. Checking often will also keep you aware of the amount owed, so the bill won’t come as a shock.

Second, you can set up a mobile alert for spending limits. Under one of my cards, there is an “approaching limit” choice, and it can be customized to any amount you choose. If you have several choices of cards with available credit, you could set this low — at, say, 10% of your credit limit, so that you get an email or text letting you know you’ve reached that. At that point, you could choose to pay what you owe, so that you once again are at 0%, or you could switch to a card that has a lower balance, relative to its limit.

Finally, you can use credit alerts to help you catch credit card fraud faster. You can set up the alerts so that you get an email or text if there is a “card not present” transaction, a foreign transaction, or if there is a charge above an amount you designate as a maximum for a single purchase. While this will not directly benefit your score, it may prevent your score from dropping because of fraudulent transactions.

Not sure what your score is? You can’t monitor it unless you know. Some credit card statements now come with a score, and you can also get two scores for free, updated every 30 days, from Credit.com. You’ll also see personalized “grades” showing how you’re doing on the factors that go into your score. One caution: When looking at your scores, be sure you compare the same score and scale each month to keep track of your progress. Scores fluctuate, and a few points up or down shouldn’t be of great concern; the trend is far more important.

The Change That Could Give Millions of Americans a Better Credit Score

Millions of consumers could be lifted out of subprime status and get better loan terms if credit reports and scores were broadened to consider on-time utility and rent payments, according to a study released Wednesday by Experian.

Experian is advocating for inclusion of non-traditional entries onto consumer credit reports, expanding them beyond loans, credit cards and mortgages. Doing so would allow consumers with “thin” files — those with very few traditional credit accounts — to more easily obtain loans and credit cards.

“By adding on-time alternative payment data to credit report files, millions of consumers could gain access to basic financial services such as loans and credit cards,” Experian said in a statement.

The Experian study suggests it could also give a second chance to consumers who have been flagged as a poor risk by the credit industry.

Experian’s study found that by including on-time utility payments in credit reports, there was nearly a 50% drop in subprime consumers with credit scores, and a corresponding 54% increase in consumers rated “non-prime,” which puts them only one level below prime.

“Since gas and electric services are used by just about every household in the country, including these positive payments in their credit files provides millions of Americans with a way to build their credit history,” said Genevieve Juillard, president of Experian’s Consumer Information Services.

Experian’s study also examined the impact of adding rent payment history to credit files, and found it lifted 20% of consumers out of the subprime category.

Last year, credit reporting agency TransUnion conducted a similar study that offered similar results. It found that 8 in 10 subprime consumers experienced an increase in their credit score after just one month of hypothetical inclusion of rental payments into their credit histories.

“We believe reporting rental payment performance is simply the right thing to do for apartment residents and the apartment rental industry,” said Tim Martin, executive vice president at TransUnion, at the time. “Renters will be able to build positive credit history, gain access to more financial products, and most importantly, help them recover from the housing market crash.

For its study, Experian created a hypothetical, adding 25 months of positive payment history to consumer credit files culled from its database.

It’s unclear what percentage of subprime or nonprime consumers would have such a clean utility or rent payment history — Experian doesn’t have full access to that information — so the real-world impact of adding alternative payment histories might be less that this study suggests. Still, it’s clear that consumers with only a small credit profile, or with a damaged profile, would see improved credit opportunities if they paid their other bills on time and got credit for doing so.

“While an individual’s credit score is important, the thickness of a credit file is also a critical factor in a lender’s decision,” said Chris Magnotti, strategic analytic consultant for Experian. “An increase in the credit file thickness alone, even with the risk segment remaining the same, can yield benefits such as lower credit card interest rates.”

Consumers who want to know more about their credit standing should check their credit regularly – they can get a free annual credit report from each of the three major credit reporting agencies. 

5 Things You Can Finally Do Once Your Credit Improves

Where was your credit in the spring of 2008? For many people it was teetering on the edge of solvency, about to plummet into the deep hole known as the Great Recession. By the end of the following year, 2009, mortgage delinquencies would climb to almost 7%, according to data by TransUnion. Credit card late payments also climbed, according to Federal Reserve data, and would peak at 6.78% in the third quarter of 2009.

If you were among those sucked into the collapsing bubble of the housing market or whose incomes took a beating in the soon-to-be tumultuous job market, your credit probably did not ride out the recession unscathed. Instead, you may have lost your home to a short sale or foreclosure, or were forced to negotiate settlements on some of the credit cards you couldn’t pay back. Maybe you even filed for bankruptcy.

Whatever damage was done, it’s now been seven years since the recession began and consumers (and lenders) are cautiously breathing sighs of relief. Delinquency rates on mortgages and car loans are at “normal” levels. New TransUnion data reveals that the mortgage delinquency rate (the rate of borrowers 60 days or more delinquent on their mortgages) declined for the 12th straight quarter to 3.29% at the end of the fourth quarter 2014.

At the personal level, negative items such as charge-offs due to unpaid credit cards are beginning to “age off” credit reports. That means some of those hardest hit by the downturn may see their credit scores improve over the next couple of years simply because negative information becomes too old to be reported. Time can sometimes be the best credit repair solution.

While the recovery is certainly not complete for everyone, for those who are starting to see their credit scores improve, the question is, “What now?” What can you do once your credit starts to recover? Here are five suggestions.

1. Refinance Your Home — or Buy One

There were three main reasons it became tough to get or refinance a mortgage after the recession: Home values had dropped in many parts of the country, credit and credit score requirements got tighter, and many people had been laid off from their jobs or taken pay cuts.

But the rate of homes underwater is steadily improving (down from a peak of 21% to 16.9% and dropping in the third quarter of 2014, according to Zillow). And in the meantime, its’ become easier to get a mortgage. Plus more people are back to work, albeit some at lower pay.

Taken together, these factors mean that 2015 could be a good year to get or refinance a mortgage. Interest rates are still low and in many parts of the country, homes are still affordable. If you haven’t shopped for a mortgage in the past year or so, now may be a good time.

2. Trade In Your Clunker

If you’ve been trying to eke a few more miles out of your car or truck before it dies, it may be time to consider replacing it. Interest rates on vehicle loans are low on average, and even dealer financing can be very attractive as automakers compete to sell their inventory. That doesn’t mean you should throw caution to the wind and go for the best car you can afford, though. Auto loan terms are getting longer — 67.2 months on average, according to Edmunds.com — and with an average vehicle price just over $32,000, that can mean significant debt for many families. But if you can negotiate a good deal on a car or truck, finance it at a low interest rate for a reasonable period of time (48 months or less is ideal), then keep it in good condition, you can come out ahead.

3. Negotiate a Better Deal on Your Credit Card

Pre-recession, the advice about credit card rates was almost always the same: Don’t be afraid to call your card issuer to ask for a lower rate. “It can’t hurt,” experts would say (myself included). But as more and more cardholders started falling behind on their payments, issuers became more cautious. Some raised cardholders’ interest rates, others cut credit limits — and some did both. Consumers who called to complain about a credit card rate that was too expensive sometimes had their limits slashed or accounts closed, especially if they mentioned that they were experiencing financial difficulties.

But most people are paying their credit cards on time these days, and issuers are back to courting cardholders and making deals, especially for those who carry balances or who charge large amounts each month. So if the cards you are carrying balances on have high rates but your credit scores have improved, don’t be afraid to see if your issuer can offer you a better deal. If not, a balance transfer may be another option for cutting your interest rates 

4. Consolidate Your Debt

If you are still paying off balances on credit cards you ran up several years ago, a consolidation loan may help you finally get those paid off. With a personal debt consolidation loan, you can often get a loan with a fixed interest rate and specific repayment period. Consolidating this way gets you off the minimum-payment treadmill and allows you to work toward a debt-free date in the not-so-distant future. And consolidation loans have become much more widely available post-recession, thanks in large part to the peer-to-peer lenders that offer them.

Home equity loans are also becoming more popular again thanks to rising home values, but all things being equal, an unsecured loan (like a personal loan) is often a safer bet in the long run when compared to a loan against your home.

5. Get Your Secured Card Deposit Back

Did you open a secured credit card to rebuild your credit after it went south? If so, it may be time to move on to an unsecured card and get your deposit back. A few secured cards offer a “graduation” feature where you can get your secured account upgraded to an unsecured one. But in many cases, you will need to get a new credit card then close out the old one.

While keeping accounts open as long as possible is often a good strategy as far as your credit scores are concerned, there are times when closing them make sense, and this is one of them. As long as you haven’t defaulted on payments on your secured card, you should be able to close your account and have your deposit returned.

Remember, with all these options, it takes good credit to qualify for the lowest interest rates and best deals. So before you start shopping, review your credit. Get your free annual credit reports, and get an idea of how lenders view your information by checking your credit scores.