Business Math in Action

Chapter 8: Loans

Becoming Loan-Worthy

It may be soon or it may take years, 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 start a business. Will the loan officer deem you a good credit risk? You might be surprised at some of the red flags lenders look for. Learn about them now to avoid future problems getting a loan.

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 have not 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 are running away from something (unless each move was due to a company relocation or 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 have 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 will be unable to handle any more debt.

Few people are perfect loan candidates, but the better your record is, the easier time you will have getting a loan. Sometimes you just need to find a loan officer who is willing to work with you. Even if you have had some problems or bad luck, do not 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. Remember, if one loan officer turns you down, you can always try another.

English Language Arts/Writing

Imagine you are a loan officer looking over a loan application to buy a house. The applicant has a 640 FICO score, has moved once and had four jobs in the past five years, uses two credit cards, makes about $4,000 a month and pays about $1,500 a month in other loans and debts. Write a paragraph explaining why or why not your bank should give the applicant a loan.