3 Common Red Flags on a Credit Report

viewing credit through a magnifying glassDozens of factors affect your credit report. Some negative items are inevitable; for example, applying for any line of credit gives reason for finance companies to look closer at the report. But why? Everyone has to start somewhere, and most people pay an occasional bill late, so what’s the point of deeming these items negative? Let’s look at this from a lender’s point of view.

Red Flag #1: Late Payments / Defaulted Loans

All lenders wish to lend to people who can repay the loan as agreed. Imagine lending money to unreliable friends; sure, they pay it back eventually, but you’re never quite sure when to expect the repayment, meaning you can’t count on reinvesting that money any time soon. So, when a borrower fails to pay as agreed on anything, their “risk” goes up and their credit usually goes down. Lenders are all about limiting risk, so they’re going to avoid such people rather than giving them a second chance.

Now, some lenders are in the business of giving risky people a second chance. But their fees are often considerably higher due to the risk associated with giving bad or no credit loans. High fees allow them to put more money toward debt collections and dismissing hopeless debt.

Red Flag #2: High Percentage of Revolving Balance

A revolving balance is how much you’ve placed on a credit card. If you can’t pay off a credit card each month, it’s best to keep the percentage low, at about 30 percent or less. For example, a credit line of $1,000 shouldn’t have more than $300 on it after payment. Anything above 30 percent is generally considered suboptimal and a “high balance.” Low balances are very beneficial to your credit, while high ones (like 50 to 100 percent) harm it.

From the lenders point of view, anyone carrying a high balance is doing so because they can’t afford to pay it off. This is probably true for the most part. Being unable to pay the entirety of a balance isn’t too bad. It’s certainly not as bad as paying the balance late or not at all. But it’s questionable to seek additional credit while maintaining a balance on the current line. If you can’t pay the previous one, lenders believe it risky to extend even more credit to you.

Red Flag #3: Recent Applications for New Credit

All applications for new credit are reported. Lenders negatively view people seeking new lines of credit, especially when those people have relatively new credit lines already. It’s a red flag because it seems as if you need additional loans, which could mean you don’t have the means to pay them back. However, credit scoring algorithms are generally lenient with people who apply for several lines of credit at once, rather than spacing out their applications over weeks. Make it obvious that you’re looking for one new line of credit, not applying on whims to see if anyone bites.

Conclusion

It’s important to view your financial situation from the lender’s point of view. After all, they’re focusing on their best interests, not yours. Few financial institutions are in the business to do favors, so keep on top of your credit score by avoiding red flags when possible. The occasional red flag is inevitable, but consistent, responsible money management should set you apart from the rest.

Posted on May 13, 2013 by in Credit Monitoring

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