Learn what lenders look for. If you’re thinking about borrowing, now’s a good time to assess your financial situation.
See where you stand financially
To find out whether you’re ready to take on new debt, you can measure your credit status against the criteria that lenders use when they review your application. When you apply for a new credit account, lenders evaluate your application based on key factors commonly known as the 5 Cs of Credit.
Credit History - What it is
Your credit history is a record of how you’ve managed your credit over time. It includes credit accounts you’ve opened or closed, as well as your repayment history over the past 7-10 years. This information is provided by your lenders, as well as collection and government agencies, to then be scored and reported.
Why it matters
A good credit score shows that you’ve responsibly managed your debts and consistently made on-time payments every month.
Your credit score matters because it may impact your interest rate, term, and credit limit. The higher your credit score, the more you may be able to borrow and the lower the interest rate you could receive.
For example, with a good or excellent credit score, you might qualify for a lower interest rate and monthly payment on a loan of $15,000. The example below explains how your credit rating may impact your annual percentage rate (APR) and monthly payment. Rates shown are for illustrative purposes only.
How to get your credit report and credit score
You can request your credit report at no cost once a year from the top 3 credit reporting agencies ― Equifax®, Experian®, and TransUnion® through www.annualcreditreport.com. When you get your report, review it carefully to make sure your credit history is accurate and free from errors.
It is important to understand that your free annual credit report may not include your credit score, and a reporting agency may charge a fee for your credit score.
What your credit score means
Your credit score reflects how well you've managed your credit. The 3-digit score, sometimes referred to as a FICO® Score, typically ranges from 300-850. Each of the 3 credit reporting agencies use different scoring systems, so the score you receive from each agency may differ.
You generally qualify for the best rates, depending on debt-to-income (DTI) ratio and collateral value.
You typically qualify for credit, depending on DTI and collateral value, but may not get the best rates.
You may have more difficulty obtaining credit, and will likely pay higher rates for it.
620 & below, Poor
You may have difficulty obtaining unsecured credit.
No credit score
You may not have built up enough credit to calculate a score, or your credit has been inactive for some time.
Capacity - What it is
Capacity is an indicator of the probability that you'll consistently be able to make payments on a new credit account. Lenders use different factors to determine your ability to repay, including reviewing your monthly income and comparing it to your financial obligations. This calculation is referred to as your debt-to-income (DTI) ratio, which is the percentage of your monthly income that goes toward expenses like rent, and loan or credit card payments.
Why it matters
Lenders look at your debt-to-income (DTI) ratio when they’re evaluating your credit application to assess whether you’re able to take on new debt. A low DTI ratio is a good indicator that you have enough income to meet your current monthly obligations, take care of additional or unexpected expenses, and make the additional payment each month on the new credit account.
How to calculate your debt-to-income (DTI)
Learn how DTI is calculated, see our standards for DTI ratios, and find out how you may improve your DTI2.
Standards for Debt-to-Income (DTI) ratio
Once you’ve calculated your DTI ratio, you’ll want to understand how lenders review it when they're considering your application. Take a look at the guidelines we use:
Your Debt-to-Income ratio can impact how favorably lenders view your application.35% or less: Looking Good - Relative to your income, your debt is at a manageable level
You most likely have money left over for saving or spending after you’ve paid your bills. Lenders generally view a lower DTI as favorable.
36% to 49%: Opportunity to improve
You’re managing your debt adequately, but you may want to consider lowering your DTI. This may put you in a better position to handle unforeseen expenses. If you’re looking to borrow, keep in mind that lenders may ask for additional eligibility criteria.
50% or more: Take Action - You may have limited funds to save or spend
With more than half your income going toward debt payments, you may not have much money left to save, spend, or handle unforeseen expenses. With this DTI ratio, lenders may limit your borrowing options.
Collateral - What it is
Collateral is a personal asset you own such as a car, a savings account, or a home.
Collateral - Why it matters
Collateral is important to lenders because it offsets the risk they take when they offer you credit. Using your assets as collateral gives you more borrowing options ― including credit accounts that may have lower interest rates and better terms.
If you have assets like equity in your home, you could potentially use your home equity as collateral to secure a loan ― this may allow you to take advantage of a higher credit limit, better terms, and a lower rate. But, remember, when you use an asset as collateral, the lender may have the right to repossess it if the loan is not paid back.
Capital - What it is
Lenders evaluate the capital you have when you apply for large credit accounts like a mortgage, home equity, or personal loan account. Capital represents the assets you could use to repay a loan if you lost your job or experienced a financial setback.
Capital is typically your savings, investments, or retirement accounts, but it may also include the amount of the down payment you make when you purchase a home.
Why it matters
Capital matters because the more of it you have, the more financially secure you are ― and the more confident the lender may be about extending you credit.
Conditions - What they are
Conditions refer to a variety of factors that lenders may consider before extending credit. The conditions may include:
How you plan to use the proceeds from the loan or credit account.
How your loan amount, interest rate, and term may be impacted by market conditions or the state of the economy.
Other factors that may impact your ability to repay the debt ― for example, a mortgage lender wants to know if the property you’re buying is in a flood zone or in an area prone to wildfires.
Why it matters
Conditions matter because they may impact your financial situation and ability to repay the loan.
Lenders may also consider your customer history when you apply for new credit. Since they may evaluate your overall financial responsibility, the relationship you’ve established with them can be valuable when you need more credit.
What is credit utilization?
Credit utilization is the percentage of your credit limits that you're using. For example, if you have an account with a credit limit of $1,000 and your balance is $100, your credit utilization is 10%. Utilization is calculated for both your individual accounts and a total utilization rate on your revolving debt, like credit cards, and lines of credit. Most experts recommend trying to stay below 30% of your limit on any card, the lower the better, while still keeping your accounts active. Lenders view high credit utilization and "maxing out" credit cards as risky.
What is the hard vs. soft credit inquiry?
A hard inquiry will occur when you have applied for something (a loan or credit card, an apartment, etc.). Hard inquiries make up 10% of your score, so recent activity can temporarily take points off your score. A soft inquiry is not related to an application (checking your own credit or when a lender pre-qualifies you for a product offer). Soft inquiries don't affect your credit.
*This information is for educational purposes only and may not be the score used by ROC Financial Solutions LLC., to make credit decisions. We may use other FICO® Score versions and other information when you apply for credit. There are many factors that ROC Financial Solutions LLC., looks at to determine your credit options; therefore, a specific FICO® Score or other credit rating does not necessarily guarantee a specific loan rate, approval of a loan, or an automatic upgrade on a credit card.