I'm a former banker, and this is the exact process I used to approve or deny loans
- As a bank manager, I reviewed credit card, line of credit, and mortgage applications that came from customers of my branch.
- Your credit score, credit report, and debt-to-income ratio are all important factors in the approval process.
- You can review your credit report and credit score today to get a better understanding of your approval odds on a new loan application.
- Need to improve your credit score? CreditRepair.com can help »
When I was a banker, I went through extensive training to learn how credit reports, credit scores, and consumer finances fit together when approving a loan. Whether you are looking for a new credit card, car loan, or mortgage loan, the underwriting process looks at your credit through a similar lens.
If you have plans to open a new loan account in the future, it's helpful to understand what the bankers and credit analysts look at when reviewing your application. Following the same steps, you can underwrite yourself for a loan, which will give you an idea of your approval odds.
Your credit score is a gatekeeper
Your credit score represents a snapshot of your credit history. Just like your grade point average gave an assessment of your high school or college grades, your credit score aggregates information from all of your credit accounts to give lenders an idea of your likelihood of paying off a new loan as agreed.
At my bank, we used credit scores as a hurdle to eliminate some applicants right away. Each bank has a different credit score threshold for approval. We didn't approve a new loan on a credit score alone, but a good score would get you in the door for a full manual review.
You can get your score for free from a site like Credit Karma or your credit report from the government-mandated website AnnualCreditReport.com.
Credit score needs some improvement? CreditRepair.com can help »
Take out authorized user accounts
When an application landed on my desk, I would start out by printing the applicant's full credit report on paper. This was a company-wide policy to ensure every applicant had the same experience and we treated every application fairly.
My first step would be to find accounts marked "authorized user." These are usually credit cards where you have a card but are not responsible for paying the bill. We wouldn't give credit for those and we wouldn't penalize for them, though they do factor into your credit score. I would just cross the account out on the page and take it out of consideration.
Circle late and missed payments in red
Next, I would look down the page for any late or missed payments. Not only is your payment history the biggest factor in your credit score, but it was also the most important part of a credit report in my eyes as a lender. Late payments stay on your credit report for up to seven years, so it's important to always pay every account on time if you ever want to get credit in the future.
Past behavior is the best predictor of future behavior. If I saw a pattern of late payments that went away five years ago, I might give the application the benefit of the doubt.
But if the pattern showed a consistent or increasing frequency of missed payment due dates recently, the loan probably wouldn't get approved.
Put red circles around every late and missed payment and tally them up at the bottom of the page. More than two or three payments over 30 days late was enough for my conservative bank to turn down a loan in some cases.
Add up your monthly debt payments
Finally, I would put a green or blue circle around every monthly minimum payment on the credit report, not including authorized user accounts. That would include credit cards, student loans, and any other outstanding loans with a balance.
Even if you pay off your credit card in full every month, which is a good habit to have, the lender would report a minimum monthly payment based on the balance on the day it reported your credit information to the credit bureaus.
The total of your monthly payments doesn't carry much weight in your credit score on its own. However, when you look at your total monthly payments in relation to your income, an important detail comes to light.
Bonus: Calculate your debt-to-income ratio
Your debt-to-income ratio, also called a DTI, is a numerical comparison of your current monthly debt payments to your current monthly income.
If you earn $5,000 per month and have $1,000 in monthly debt payments, you would calculate your DTI by dividing $1,000/$5,000. In this case, your DTI is .2. This means you have to pay 20% of your income in debt payments each month before dealing with other bills and expenses.
Like other areas of your application, each lender has its own rules on how to apply DTI. It might influence your credit limit with the lender or if you get approved at all.
Would you approve yourself for a loan?
When a friend or relative asks you for money, you think about whether or not they are likely to pay you back before making a decision. When you ask a bank or other lender for money, they go through the same process. It's just a bit more formal for a bank.
Looking at your credit score, credit report, and debt-to-income is enough for many lenders to decide if they will approve the loan. If you look at that information today, would you approve yourself? If you wouldn't lend to yourself, odds are a bank wouldn't either!
Underwrite your "loan application" today to decide if you would be approved. If not, take some steps to improve your credit and financial situation until you would give your loan application a glowing approval.
If your credit score's not quite up to snuff, CreditRepair.com can help you raise it. Find out how today »
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