Credit Score Factors

One of the great mysteries of the credit card marketplace is how exactly the approval process works. Yes, we all know that credit card companies will run a FICO check (Transunion or Equifax) on applicants to determine their credit rating, and this credit rating is an important factor in determining whether or not an applicant is accepted.

However, note that we use the word “factor”, which suggests multiple contributors. There is a widely-held misconception that FICO score is the sole determinant in approval and this is not true – a lap around the internet will offer many anecdotes in which two identical FICO-scores receive opposite answers on applications to the same credit cards. Why?

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The answer varies from issuer to issuer and from card to card. The X factor, and something that is quite difficult to measure, is the conservativeness of underwriters for particular issuers and the short term objectives of a credit card. This is extremely hard to quantify from the outside and we will not try. Instead, we will identify three different factors that are often used to determine which applicants are approved and which applicants are rejected.

1) FICO scores

FICO scores provide illustrate creditworthiness, somewhat approximating the scoring shown below.

Credit score range for Canadians

 

A number of factors are used to determine this score, with the factor and comparative weighting shown below.

Learn how credit scores are calculated

So FICO presents a comprehensive picture of an applications credit history, most importantly payment histories and the amounts owed – the latter encompassing both current and historical debt. Of lesser but still important value is the length of credit history as well as they types of credit utilized.

The FICO score does not show a few things. It cannot predict your value as a customer to the issuer. It cannot extrapolate likelihood of paying back debt that exceeds your historical norm. And it is unable to assume the creditworthiness of applicants who have had no chance to build a credit history.

 

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2) Disposable Income

This brings us to our second factor – an analysis of an applicant’s disposable income. Check out a credit card application, and you will see a number of questions designed to determine income and fixed liabilities – like rent or mortgage, car payments, alimony, utilities and so on. From this, credit card companies will be able to approximate the amount of money an applicant has available to spend, which is useful for determining:

  • A fee-amount the credit card company can reasonably expect
  • If an applicant will be able to handle a higher credit limit

And of course, this allows the credit card company to determine the return on investment they can expect, which can be of great importance to premium card who provide massive fixed value to attract good credit card customers. So you might have a sterling FICO score, but if the credit card company assesses that you are a poor return on investment you might get rejected anyway. Or alternatively, you might have a slightly worse FICO score with good peripheral stats, and you are approved anyway.

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3) Responsibility

If the previous factor attempts to measure a customer’s fee and balance payment upside, this factor attempts to weigh downsize, or the risk of loan default. There are any number of factors that can be used to build a risk profile. We list two, but let your imagination run wild you free spirit.

Mortgage Versus Rent:

Paying off a mortgage usually demonstrates good planning, fiscal responsibility, consideration of the future, the building of equity, etc. Of course, someone who has taken a mortgage above their means could very well demonstrate the opposite – and perhaps make themselves less attractive when considering income versus debt obligations discussed above. So really, probably best to describe this one as: Applicants who are paying down mortgages valued in a reasonable correlation to income.

Types of Loans:

Some issuers will automatically reject anyone who has ever taken out a payday loan, assuming that someone who would actually sign up to such terrible terms can not be of sound financial reasoning. Moral of the story – never take out a payday loan.

Closing Balance

As we mentioned somewhere in the introduction, the X-Factor is the conservativeness underwriters for a particular issuer. We also alluded to the temporary business needs of an issuer at a specific point in time.

For instance, perhaps a bank is trying to push users to their premium offers, and decides to target high level of disposable income with less credit history. Maybe a credit card is underperforming their new card holder quarterly target; instruct underwriters to show greater tolerance for lower FICO scores. Conversely, perhaps default rates have risen to an unacceptable rate – raise the FICO requirement and place more emphasis on the responsibility factor.

The conservativeness of a particular bank’s underwriters is difficult to determine, and the impact of short-term objectives on approval rates is basically unknowable. However, check out our articles on bad, fair and good credit for listings of the types of cards that generally correspond to each respective category, as well as additional information to help determine where you most likely fit.

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