Business Math in Action

Making Sure You’re Loan-Worthy

It may be when you’re 20 years old, it may be when you’re 40, but sooner or later you will probably want a loan. Most people rely on loans to make large purchases such as a car or house, or to finance a start-up business. Will the loan officer deem you a good credit risk? You’d be surprised at some of the red flags they look for. Learn about them now, and you can avoid these missteps before it’s too late.

Low FICO score. This is the most common stumbling block to getting a loan. FICO stands for Fair Isaac Corporation, a company that assigns a score to every person who uses a credit card or other loan instrument. Most people have scores in the 600s and 700s. A person with a score below 620 is usually considered a poor risk, while someone with a score of 750 or higher is considered extremely desirable. Your FICO score will drop if:

you are late on credit card payments

you consistently max out your card

you haven’t had a card for very long

you have applied for several new credit cards or other loans in a short period of time

you have incorrect creditor complaints on your record

Too Many Moves. Changing houses and cities frequently can make it seem as if you’re running away from something (unless each move was due to a company relocation and promotion).

Too Many Jobs. You will need to explain your job-jumping and reassure the loan officer that you have a steady stream of income.

Too Much Credit Already. Some people like to keep a few extra credit cards around for emergencies, even if they never use them. But loan officers consider the amount of debt you could rack up, not just the debt you actually have. Before applying for a loan, keep the credit card you’ve had the longest and cancel the others.

Living Too Large. Most lenders believe that if your monthly payments on credit cards and other loans add up to 38 percent or more of your income, you can’t handle any more debt.

Few people are perfect loan candidates, but the better your record is, the easier time you’ll have getting a loan. Sometimes it’s just a matter of finding a loan officer who is willing to work with you. Even if you’ve had some problems or bad luck, don’t lie to the loan officer or leave part of the application blank. Instead, think about your background before you meet with the officer and decide how you want to explain that piece of history. And don’t despair: If one loan officer turns you down, there will always be another.