7 tips to improve your creditworthiness

By Mark B. Aragona for Yahoo! Southeast Asia

Unless you’re moneyed to begin with, you will need loans to purchase a house or a car. But the reality is that not everyone who applies gets the loan right away. Banks and financial institutions run stringent checks to determine who gets the credit and who gets shown the door. The question is—what can you do to get on the bank’s good credit list?

An interview with a bank analyst and former loan officer reveals what banks use as indicators of risk. Lenders rely on what’s known as the three C’s of credit: character, capacity, and depending on the size of the loan, collateral. Character is the sense of the borrower’s willingness to repay his debt. Capacity is the measure of the borrower’s financial means to pay. Finally, collateral comes into play when, due to the size of the loan, the bank or lender asks for something of value for added security.

With these in mind, here are some tips to help you be more “loan-friendly” to a bank’s eyes:

Character


A person’s occupation is a big determinant of character. Banks are most willing to lend to those with a regular well-paying salary, as opposed to people who are self-employed but perhaps not as stable or suffer from seasonal cashflow. This does not mean entrepreneurs and other self-employed folks are right out—they may still get a loan, but likely with steeper terms.

Since career is often not something you can readily change, there are other things you can do.

1. Have a good credit history. Ironically, banks are more willing to loan money to people who’ve borrowed before and have a good record of repayment. Of course, this makes it doubly difficult for those who have not obtained a personal loan before or don’t have a credit card. Moreover, banks pay attention to missed payments and defaults, both of which damage your creditworthiness.

2. Have a creditworthy co-maker.
A co-maker is someone who will co-sign your loan and thereby promise to pay in the event you are unable to. In the case of married couples, banks would require your spouse to be the co-maker of your loan, particularly if you both own the collateral like, say, the family home.

3. Borrow for a specific, personal reason. The bank must understand that you’re getting the loan for a very important personal expense aimed at preserving your lifestyle, such as buying or renovating a house or sending your child to school. If the bank sees you want to spend money on something questionable, they will feel you have less reason to pay back your debt.

Capacity

Simply put, capacity is related to how much money you make. As such, you should:

4. Keep complete and accurate financial records. Banks look for ample documentary evidence that you are indeed earning what you say you are. This is easier for employees as they already have a pay slip and most likely file accurate income tax returns. Banks will then look at these items, assume you spend a particular amount on living expenses, and then stipulate an amount you can avail of.

Collateral

Collateral comes into play for large size loans and longer terms. Collateral mitigates the bank’s risk by having the lender put up a valuable item they own in exchange for the loan. Houses and cars are common choices for collateral, and there are even thrift banks that do jewelry loans.

5. Provide something of preservable value. The collateral’s value shouldn’t quickly depreciate, and it should have a ready market in case an auction is necessary. Note that the more flighty the item’s value, the higher the interest rate you are likely to pay.

6. Insure your collateral. You must have the usual fire insurance for homes and auto insurance for cars. Having no insurance at all on the item is usually a deal-breaker for banks.

7. Lastly, once you’ve gotten the loan, make sure you keep your credit clean. Never mismanage your cash, always keep accurate financial records, and if possible, pay for loans ahead of time just to show the bank you’re willing and able to settle your debts. Having a good credit record now is the best way to help you gain credit in the future.

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