Think the Credit Bureaus Are Why You Got Denied? Think Again.
You’re probably painfully aware if your credit score is labeled as “very poor.” Maybe you’re excited because your score has nearly reached a “good” FICO rating. Wherever you are, know that the credit bureaus aren’t the reason you get approved or denied for a loan or credit card.
The three major bureaus (Equifax, Experian, and TransUnion) aren’t sending reports that claim you yourself are either “good” or “bad.” They’re not blatantly telling lenders to approve or deny you. That’s not their job.
Learn more about how lenders make their decisions and how you can get your buying power back.
Here’s How It Works
Keep this list of facts in mind as you apply for loans and credit cards. Know what’s going on behind the scenes as important decisions are being made.
1. You can work to raise your credit score.
The bureaus simply calculate based on your “financial behavior.” They use scoring models; FICO and VantageScore are the two most commonly used. Most credit scores are comprised of the following:
• Payment history (35%)
• Credit utilization (30%)
• Length of credit history (15%)
• Diversification of credit (10%)
• New credit inquiries (10%)
It’s a “don’t shoot the messenger” scenario. If you’re submitting late payments and your credit utilization is high, your credit score will reflect that. The bureaus will report based on the facts they’re given by your current lenders and creditors. Bureaus are the messengers.
Good news? You can change your behavior. Pay off balances to lower utilization, and do everything in your power not to miss payments. These two factors weigh heavily in the calculations noted above. So, sign up for reminders with your credit card, or activate an auto draft and ensure your accounts remain up-to-date.
2. Your score paints a picture of your financial character.
The bureau doesn’t decide if you’re “good” or “bad” in a lender’s eyes. They paint a picture of how you use lines of credit that are extended to you. It’s not a personal judgement. Your credit score tells lenders or creditors how likely or unlikely you are to pay off your debt. It’ll reveal if you’re prone to miss payments, given your credit history.
The bureaus are responsible for delivering 3-digit numbers. They each have their own unique files and scores attached to you. Landlords, utility companies, and potential employers may request your score. This helps them decide if they want to rent to you, offer you a service, or hire you.
The bureaus send the information, but they’re not swaying anyone to make a particular decision. They’re letting the numbers speak for themselves.
3. Lenders have their own definition of “good” and “bad” credit scores.
We’ve already said it: the bureaus simply send the score. It’s up to the lender or creditor to decide whether or not you get the loan or credit card. It’s up to them to determine interest rates as well.
They decide if you’re a good risk or a bad risk. And a poor score doesn’t mean you can’t secure a loan or a credit card. You can. But it may mean a higher interest rate and significantly more to pay out over time.
Companies define “good” or “bad” credit in their own way. One lender may approve scores of 680 or higher. A different lender could be more selective and seek a score of 750 or higher. Maybe both lenders find 650 acceptable, but they may charge people with a score of 700 or lower that higher interest rate.
Here’s the Exception…
There’s always an exception, right? The bureaus may be responsible in part for your failure to secure a line of credit. That is, if they’re reporting inaccurate, negative items. But even then, it’s your job to get your free annual credit report and check for such inaccuracy.
If you notice something incorrect, you must file a dispute because even a seemingly “tiny” error can have major implications when it comes to your credit score. In fact, inaccuracies can certainly keep you from securing a home, auto, or business loan, as well as better rates.
Do yourself a favor and check your report periodically. It just might make a huge difference in your score and the loans, lines of credit, and interest rates available to you!