Money expert Clark Howard says the credit industry is undergoing some changes that could affect whether you’re approved for a credit card, mortgage or auto loan.
In the past, when you applied for a loan or a credit limit increase, if you were denied, that was the end of it. Sometimes it would take months — or years — to get a different outcome. On the other hand, if you had a good credit score and other favorable circumstances, you would typically be a shoo-in to get approved.
But times are a-changing!
How Lenders Are Evaluating Your Creditworthiness Differently Now
A letter Clark got recently from a lender helps illustrate the point.
“I asked for a limit increase months ago and got turned down,” he says. “Then out of nowhere, I got a congratulatory letter saying, ‘Because of your outstanding credit, we have raised your credit limit!’”
Perhaps you have experienced or heard a similar story. What’s going on? Clark says part of the change is pandemic-related, but there’s more to it than that.
“Lenders got really scared starting March of last year and shut off people’s credit, reduced their lines, all that kind of stuff. But there’s something bigger and deeper going on, and that is that lenders are assessing you differently one to another.”
One lender may be willing to take on more risk, he says. Another lender, because of its own issues, may be willing to take on less risk.
The reason? Clark says that many of the big lenders are now using their own proprietary evaluations of people based on their own experiences with them as customers.
For example, you may be aware that many lenders use your FICO score to evaluate your creditworthiness, but others may utilize your VantageScore instead. Still others may use other scoring models that are not as well known to the consumer.
3 Things Lenders Look for Before Extending Credit
Let’s take a look at a few ways lenders are scrutinizing credit-seeking customers today.
1. New Spending, Borrowing Patterns and More
“They’re evaluating you based on your payment patterns, your charge patterns and how you handle the credit you have. And there are things that may not be apparent with traditional credit scoring,” Clark says.
His example: credit issuers may stray outside the traditional parameters to judge the creditworthiness of their existing customers.
“Lenders feel like if you’re been with them a substantial period of time, they have enough scoop on you that if they see changes in a pattern — things that wouldn’t normally show up in a normal accumulation of data with Equifax, TransUnion and Experian — they may make a decision that hurts you or helps you based on what they know about you from being an existing customer.”
2. Your FICO Score
Lenders have long used this scoring model from data analytics company Fair Isaac Corporation (FICO). But Clark says what’s different is that lenders are now checking your FICO score more often.
“So they’re looking at it every 30 days to see if you should be booted or not — or to try to lure in more business from you,” he says.
3. Their Own Bottom Lines
It appears that, more than ever before, lenders are making decisions on potential profit.
“You’re going to have the same credit profile you present to different lenders, [but] the same profile person could see very different offers based on how hungry that particular lender is for business,” Clark says.
How To Protect Yourself When It Comes to Credit
All of this is why Clark is strongly advises you to be judicious about the credit you take on.
Case in point: car loans. Here are two things you should try to avoid when you borrow money to buy a vehicle.
Long Car Loans
“People are spending a lot of money on vehicles these days,” he says. “And they tend to take out loans a lot longer than I want you to take on.”
That’s why Clark wants you to follow his 42-month rule.
Auto Financing From the Dealer
“If you listen to me for a long time, you know that 80% of people do this wrong: getting your vehicle loan from the dealer,” Clark says. “Most people — out of convenience or impulse — end up going to the F&I Department (finance and insurance department of the dealer) and say, ‘OK, so what are you going to do for me?'”
Clark says not only are car loans from the dealer some of the worst deals out there, but there’s also a good chance you won’t even be able to read the fine print when they show you the papers to sign. “A lot of lenders are using these tablets, and it’s impossible to see,” he says.
The credit industry is changing the way it judges your creditworthiness, but the key to getting a good deal is still to do your research before you sign the dotted line.
“If you don’t shop for your loan as hard as you shop for the vehicle, you’re throwing money away that could be in the thousands of dollars over the life of the vehicle loan. And these rules apply to mortgages as well,” Clark says.