Applying for Credit
Lenders look at more than just personal information when you submit a credit or loan application. Your request is subject to other criteria that evaluate your ability to repay.
The Three C's
- Capacity. Based on your current debts and income, will you have the capacity to repay? Your length of employment, type of job, and credit payment histories are all factors a lender will look at in determining your ability to handle debt.
- Collateral. Do you have assets creditors can take from you if you don't maintain payments on your debt? Included in this list is anything of considerable worth such as a home, car, or boat.
- Character. What type of financial character do you display? For lenders, signs of stability include owning a home (they know where to find you if they have to collect) or maintaining a long residency.
Your Credit Score
Lenders have developed a magical formula for determining whether you should be given credit or not. It's called a "credit scoring" system -- a statistical summary of your credit file calculated using raw data and other models. One can only guess how a credit score is really measured. Factors likely to encourage a favorable score might include home ownership, a decent paying job, college education, or a solid payment history.
Credit scoring is usually more reliable than other subjective methods. A computer simply looks at an individual's application, assigns points based on their information, then makes a comparison with other persons having the same credit profile.
If you're turned down for credit because your credit score is too low, you might want to ask the creditor what criteria were used to assign your score and the best ways to improve your application. They may be able to help.
Protecting Your Consumer Rights
Take a look at two important consumer credit laws that affect your ability to apply for credit -- the federal Truth-in-Lending Act and the Equal Credit Opportunity Act.
- Truth-in-Lending Act
The federal Truth-in-Lending Act was enacted to help consumers make better decisions about credit. It was also designed to prevent the credit industry from abusing credit cost disclosure statements -- the fine print you're supposed to read. Lenders or grantors of credit are now required by law to provide you with detailed information about your terms of credit. Disclosures must be clear, concise, and openly available to consumers.Specifically, they must address:
- The amount being financed.
- The annual percentage rate (APR).
- The number and amount of monthly payments.
- The method of balance calculation as it applies to finance charges.
- The number of days in the grace period before payment must be made.
- Any annual fees that are applicable to the account.
- The size of the credit line and who actually issues it.
- The cost of credit insurance, if you apply for it, and how your debts will be paid if should you pass away.
- Equal Credit Opportunity Act (ECOA)
The Equal Credit Opportunity Act (ECOA) was enacted to prevent acts of unfairness. The ECOA "prohibits credit discrimination on the basis of sex, race, marital status, religion, national origin, age, or receipt of public assistance". Creditors aren't allowed to use any of this information against you, period.
According to the Equal Credit Opportunity Act:
- You have the right to have "public assistance considered in the same manner as other income". In other words, welfare or other recipients can't be denied credit based solely on the source of their income.
- If you're denied credit, you have a "legal right" to know why. The creditor must give you a notice "that tells you the specific reasons your application was rejected or the fact that you have the right to learn the reasons if you ask within 60 days.