When applying for a loan, you generally want to avoid having anything on your credit report that might make you look risky. Not only can negative items hurt your chances at scoring a low interest rate, but they also can get you denied for a loan. Here are five credit report items that can give lenders the heebie-jeebies.
1. Co-signed loans
While you might view a loan you co-signed for a loved one as their debt, your credit report treats it the same as an account on which you’re the primary borrower. Although the extra debt often isn’t enough on its own to keep lenders away, it increases your overall debt load and debt-to-income ratio, which can make you look like more of a risk than you think.
Think twice before co-signing on a loan or a credit card, especially if you plan to apply for a loan for yourself in the near future.
2. Multiple credit inquiries in a short time
If you’re in the habit of signing up for credit cards just to get the signup bonuses, know that the practice can hurt your chances at borrowing in the future. Even if you make your payments on time and in full every month, multiple hard inquiries on your credit report in a short time can signal to lenders that you’ve fallen on hard times financially and are using credit to get by.
To prevent your credit applications from giving off a bad vibe, apply only when you actually need the credit. It’s smart to limit applications to one every six months.
3. Bankruptcy that hasn’t been discharged
Before you can obtain credit after filing for bankruptcy, many lenders will require that the bankruptcy is discharged from the court. This is because you can still add debt to your bankruptcy with an amendment until it has been discharged. Since lenders don’t want their loan included in your bankruptcy, they may not consider your application.
As a rule of thumb, Chapter 7 bankruptcy can be discharged four to five months after the case is filed, and Chapter 13 bankruptcy can generally last three to five years before discharge. It may take longer, however, depending on the case. Avoid confusing a discharge with a motion for discharge. Once a motion for discharge has been submitted, it can still take some time for the court to process it and issue a formal discharge letter.
4. Short sale
Homeowners typically enter a short sale to avoid the negative stigma of foreclosure and have more control over the sale of the home. However, going the short-sale route instead of foreclosure may not make a difference on your credit report.
Instead of seeing “short sale” on your report, lenders will see something such as “charge off,” “settled for less than the full amount due” or “deed in lieu of foreclosure.” In the eyes of a lender, each can be treated as seriously as a foreclosure and can make it difficult to get approved for a loan, especially a mortgage.
5. High credit card balances
Although lenders can’t see whether you’re just making the minimum payment every month on your credit card bill, a high balance might suggest this is the case. This can signal to the lender that you’re financially unable to take on another debt payment. For this reason, it’s better not to let the balance exceed 30% of your credit limit, and lower is even better.
You may have a high credit utilization ratio on your credit cards even if you’re paying your balance in full every month. It just depends on when the issuer reports data to the credit bureaus. Credit card issuers typically report your balance close to your statement date; you can avoid having a high balance reported by making smaller payments multiple times throughout the month.
The bottom line
Whether you’re trying to build your credit history from scratch or protect it from bad financial decisions, it’s essential to carefully consider every loan or credit card you apply for. What may seem like a good idea in the short term can have negative long-term consequences.
This article updated Aug. 5, 2016. It originally published June 25, 2015.