Lenders evaluate three main criteria when considering an extension of credit: the consumer’s ability to pay, any collateral offered as collateral, and its character. Although the lender’s representative may not personally know the borrower, all of the information used to make those determinations is included in the credit report and is factored into the credit score. Restricting lending activity to those with higher credit scores minimizes the overall potential risk faced by the lender.
- Ability – This calculation 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 higher earnings. A borrower’s stable career and consistent income may merit an increase in capacity calculation and improve their qualifications for the loan.
- Collateral – Assets that a lender may seize in satisfaction of an unpaid debt are considered collateral, whether or not the borrower pledged them directly as collateral for the loan. Creditors may make a loan conditional on the borrower posting enough collateral to secure the debt, depending on the borrower’s credit history and the amount 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 for the delinquent loan.
- character – Several factors are evaluated to determine the financial character of the borrower. Stability in employment and residence is 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 signs of a financial nature.
The data models used by credit bureaus to calculate consumer credit scores take each of these lender requirements into account. Before credit is extended, lenders can automatically preset limits, rates, and term based on a consumer’s credit score. Most major lenders have procedures in place to review such automated decisions, if circumstances suggest the need. Consumers can generally request a review of their credit report from major lenders to increase their credit limit or lower their interest rate.
