Lenders look at three main criteria when considering an extension of credit: the consumer’s ability to pay, any collateral offered as security, and its character. Although the lender’s representative may not know the borrower personally, all of the information to make those determinations is included in the credit report and counts toward the credit score. Restricting lending activity to those with higher credit scores minimizes the overall potential risk facing the lender.
- Ability – This estimate of the amount of debt the borrower can realistically repay is based on income and existing debt. Lenders also consider the borrower’s employment history and the likelihood of increased earnings. A borrower’s steady career and steady income may warrant an increase in the capacity estimate and improve their loan qualifications.
- Collateral – Assets that a lender can seize in satisfaction of an unpaid debt are considered collateral, whether or not the borrower gave them directly as collateral for the loan. Creditors may make a loan contingent on the borrower posting enough collateral to secure the debt, depending on the borrower’s credit history and the size of the loan. Even if the loan was made without a collateral requirement, the lender can still file a lawsuit to force the borrower to give up those assets as payment on the delinquent loan.
- character – Several factors are evaluated to determine the financial character of the borrower. Stability in employment and residence are considered. It matters whether the consumer owns, rents, or leases. Although the credit report cannot indicate the value of checking or savings accounts, having those accounts in good standing are financial signs.
The data models used by credit bureaus to calculate consumer credit scores take into account each of these lender requirements. Before credit is extended, lenders can automatically preset limits, rates and the term based on a consumer’s credit score. Most major lenders have procedures to review these automated decisions, if circumstances suggest the need. Consumers can usually request a credit report review from major lenders to increase their credit limit or lower their interest rate.