Banks do not just examine your FICO score when it comes to making lending decisions. They use their own internal scoring models as well as other loss mitigation tools and data to gauge how credit-worthy you are.
As a rule of thumb, many banks use three guidelines: Character, Capacity, and Collateral - the Three C's of good credit. But as you read below, they also consider Which Customer Is More Profitable To The Bank?
Character: Lenders will examine your credit history and paying habits in order to assess your character. They obtain this information from a credit-reporting agency such as Experian, TransUnion or Equifax. It is not unusual for a lender to look at credit reports from all three credit bureaus. They need to gauge your trustworthiness, and if you will be able to pay your bills on time.
Capacity: Lenders will want to know your current income and employment history, both of which are not part of a credit score. They may also consider your tenancy status, whether you rent or own. An unemployed person with no sources of income usually will not be approved for a home mortgage, regardless of his or her FICO score.
Collateral: Collateral refers to the material security that a lender may require in order to give you credit or a loan. A collateral could be a car, a house or stock certificates. If you have more assets, pledged or not, the lender will look more favorably at your loan request.
All three C's play an important role in granting credit.
If you have high credit scores/better character, you are more likely to obtain a credit card or a loan with good terms, meaning one with lower interest rates.
Also, a person with more assets is more likely to get loans with better terms than someone with fewer assets.
Lastly, banks will be more likely to lend to you if you have a low debt-to-income ratio.
Sometimes, lenders may even turn you down based on an internal assessment which compares your risk profile to that of other applicants at the same time, and even which customer is likely to be more profitable for them, which leads us to the next factor that banks consider:
Which Customer Is More Profitable To The Bank?
Banks choose customers for their own good, NOT yours. They aren't obliged to give credit to you, so their scoring process is more about profit, not risk.
Ever since the credit crunch of 2008 till now, this has become a bigger problem.
Of course they aren't likely to accept a customer who is highly unlikely to repay the debt as that would erode their bottomline, but it has become increasingly common for the more creditworthy consumers to be rejected if they are deemed unlikely to behave in a way that will generate profit for the banks.
Read these articles on GET.com:
What Is A FICO Score, And Why Should I Know About It?
How To Improve Your FICO Score
updated Aug 25, 2016
Ivan Daniel is a writer at GET.com a lifestyle and personal finance website. Email: firstname.lastname@example.org.
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