Credit Criteria

What Are Credit Criteria?

Credit criteria are the factors used by lenders to determine whether or not to approve a new loan. Although the specific criteria for individual lenders may vary, many weigh your credit score and income as key factors. A lender will approve or deny a loan based largely on how much you make and what's contained in your credit report.

Understanding Credit Criteria

The key criteria that lenders look at strongly mirrors the measures used to calculate your credit score. The five key credit score factors include:

• Payment history (35%)
• Credit utilization (30%)
• Average age of credit accounts (15%)
• Composition of accounts (credit mix) (10%)
• Credit inquiries (10%)

These factors, put together by the three top credit bureaus, are then fed into a credit scoring model that weights them by importance to produce a credit score. The FICO score is the most widely used, but there are other credit scores from different providers as well, but FICO is the most frequently used, informing about 90% of all lending decisions.

Although they may seem complex, the underlying intent of the credit criteria is simply to estimate the creditworthiness of the borrower. Applicants with a history of regular and complete payments and relatively infrequent credit inquiries will be favored.

Similarly, most credit scoring models will prefer applicants who have remained well within their overall credit limits (using more than 30% of your available credit is frowned upon) and have a long track record of responsibly maintained accounts. By contrast, applicants who have recently opened several new credit accounts or have missed payments in the past will be scored less favorably by most credit models.

Special Considerations

Beyond looking at these common credit criteria, lenders will sometimes also perform additional due diligence. In doing so, they are often guided by what has become known as “the five Cs of credit,” which is a colloquial framework for assessing a borrower’s creditworthiness. These consist of the borrower’s character, capacity, collateral, capital, and the conditions of their loans.

Ultimately, a lender is free to consider any or all of these factors when deciding whether to approve a loan. However, it is important to note that due to rights legislation such as the Equal Credit Opportunity Act (ECOA), factors such as the borrower’s race, color, religion, national origin, sex, marital status, age, and acceptance of public assistance cannot be considered when making credit-granting decisions.

Example of Credit Criteria

Sal is applying for a personal line of credit at an American bank. As a recent immigrant, he is eager to build his personal credit history in order to qualify for a mortgage at a later time.

In preparing his application, Sal begins by researching the factors that are important to the bank when assessing new credit applicants. He notes that most banks prioritize factors such as the reliability with which the borrower has made their payments in the past, the overall level of credit used by the borrower, and the length of the time for which the applicant has been a credit customer.

Thankfully, Sal had planned ahead to ensure that his application would be as strong as possible. When he first arrived in America five years ago, he signed on as the authorized user of his American cousin’s credit card. By ensuring that he and his cousin paid their credit card in full each month, Sal was able to demonstrate a reliable payment history while also building a track record as a credit customer.

Since then, Sal has been able to obtain his own credit card and has been careful to stay within his credit limit while continuing to make his payments in full and on time. By understanding and planning ahead, Sal is cautiously optimistic that his loan application will be accepted by the bank, due to the strengths of his credit criteria.