HOW LENDERS VIEW YOUR CREDIT

At some point, everyone is likely to need credit! It is the nature of our lifestyles that we will need a car, a major appliance or want to buy a home before we have saved enough money to pay for it in cash. In today's near-cashless society a credit card has become a necessary to rent or lease anything or to obtain telephone or water service. In order to travel you need a credit card to make room or car rental reservations. Just about every business arrangement requires a verification of credit.

Lenders provide financing to consumers who either do not have readily accessible cash or wish to amortize payment for goods and services.

Lenders generally provide financing for specific sectors of the borrowing public and fall into one of three categories:

• consumer lenders
• credit card companies
• mortgage lenders

Their underwriting, lending policies and charges vary widely because they:

• serve different clientele
• finance different goods and services
• assume different levels of risk
• obtain funding from different sources (secondary markets)

So it is understandable that lenders have operated independently of one another and set their own individual underwriting standards and lending policies.

When you apply for credit, a lender compiles a credit profile to determine your ability and willingness to repay any credit extended. Elements of this profile include your income, work history, credit reports (credit score), and their previous credit experience with you. This factual picture provides lenders with a fair representation of the risk involved in extending you credit.

Your credit profile is one of the primary elements that a lender uses to determine whether or not to grant you credit and if so, how much credit and at what interest rate.  

CONSUMER LENDERS
Consumer lenders provide financing contracts (installment credit) with specific amount/payment/time for major purchases such as automobiles or household furnishings and appliances. Because they finance a specific item they often hold a lien on the title of that merchandise in the form of a pink slip for automobiles and a UCC (Uniform Commercial Code) filing on other major purchases. The amount borrowed, the payment schedule and other terms are set at the signing and generally are fixed through the full term of the loan. This type of credit is considered non-revolving. Because there is an element of security, the loan costs and interest charged are somewhere between those of a mortgage loan and a credit card.  

CREDIT CARD COMPANIES
Credit card companies provide a revolving line of credit with a maximum credit amount that the borrower may access. The loan balance and payments vary according to the amount advanced by the credit card company. Credit cards are secured by your signature and good name. Because there is no tangible security, the cost and interest charged generally runs higher than other forms of borrowing.  

MORTGAGE LENDERS
The originating mortgage lender compiles a credit profile on the borrower that includes a merged credit report from the three major credit reporting agencies.  The profile includes work history, income history and any legal items on the public records. This profile is then underwritten to evaluate if the borrower meets their lending standards. Upon approval, mortgage lenders provide monies to finance home mortgages. Most use standardized criteria to evaluate a borrower's credit worthiness with the FICO credit score becoming more important in the underwriting process.