Frequently Asked Questions: CREDIT APPROVAL
Our readers want to know...

"How do you qualify for credit?"

When you apply for a credit card, for an auto loan or a home refi, lenders will consider you past use of credit as an indicator of how likely you are to make on-time payments in the future.

You will be granted a line of credit when you can (1) demonstrate good credit habits from your past, (2) show the ability to repay the new loan, and (3) offer enough collateral to minimize the lender's risk.

Bottom line, most lenders really could care less if you get that new car or not. They really don't care if you live in an apartment or in a new house of your own. What they really DO care about, however, is if they will get their money back, on time, and earn interest on the money they've lent.

Knowing this will help you understand how you can qualify for credit in the future. You must have the income to show lenders you will have the money each month to repay your loan. You must have enough assets to pledge as collateral. And you must demonstrate responsible use of credit in your recent past to assure your lenders that you will do the same again.

Careless, reckless attitudes toward credit will eventually prevent you from having free, unfettered access to capital when you need it most. You'll find that dream car or that great investment property, and your past poor credit history will rear its ugly head and deny you the fund you need to borrow.

Qualifying for credit means showing an acceptable debt-to-income ratio, which can be calculated by taking the total of all your monthly bills and dividing that sum by monthly income.

So, if your total expenses are $1500, and your monthly income is $4,500, then your debt-to-income ratio is 33% -- generally speaking, an acceptable percentage for most lenders.

Then again, you could have a far lower debt-to-income ratio than that, and combine it with poor credit, lenders will either ask for more assets to serve as collateral, or a co-signer on the note to ensure timely payments are made, or both.

Other factors that do indeed impact if you will qualify for a loan could include how long you've lived at your current address and how long you've worked for your current employer. In short, the longer, the more stability; the more stability, lenders see less risk.

By earning more money and reducing debts to improve your ability to repay your debts, combined with building up more free-and-clear assets in your name, you'll take two big steps toward qualifying for more credit in the future.

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