What is a Credit Application?
A credit application is a request by a borrower to a lender for an extension of credit. Credit applications may be submitted either in writing or orally. The application must include all information requested by the lender to determine whether the applicant is approved. Credit applicants have the right to fair treatment.
- A credit application is used to request money from potential borrowers or access to it by lenders.
- Credit applications are now possible online. They can be approved quickly and often in a very short time.
- Credit applications are governed under laws that protect borrowers from discrimination and unfair lending practices.
Also read: What Is A Revolving Line of Credit?
What are the Questions on a Credit Application?
You will be asked a series of questions when you apply for credit. In many cases, you will also need to provide documentation. This information is used by the lender to determine whether or not it is safe to approve your request.
Although applications can vary depending on the type and lender of the loan, the Consumer Financial Protection Bureau states that the following information will likely be required:
- You will need to provide proof of identity, such as a driver’s license or another official ID.
- Documentation of any recent name change
- Your Social Security Number
- The last 30 days of pay stubs
- The W-2 forms from the past two years
- Signed federal income tax returns from the past two years
- Documentation of all other income sources you may have
- Two of your most recent bank statements
If your mortgage application is for the first time, You may be asked to explain the source money of your downpayment is coming from and to provide documentation to support that.
It will save you time and speed up the application process if all this information is collected in advance.
Lenders are not allowed to ask certain questions. These questions include: whether you plan to have or raise children; whether you receive alimony, child maintenance, or separate maintenance payments (with certain exceptions); and information about your spouse (with certain exceptions such as if you apply jointly.
Where Credit Reports and Credit Scores fit in
This is in addition to the information that you provide in your application. Lenders will usually request credit reports from one of the major credit bureaus (Equifax or TransUnion) along with your credit score. Your credit score may be adjusted to suit the type of credit you are applying for, such as a credit card or an auto loan.
Although your application focuses largely on your assets and income, your credit report shows the lender how well your debts are being managed. It also lists your monthly credit payments over the past seven years.
You will be penalized for any missed payments, even if there is more than one. Your credit utilization rate will be examined by the lender. This is the ratio of the amount that you owe to others and the credit you have at your disposal. If you have two credit cards that have a combined credit limit of $40,000 and an unpaid balance of $20,000, your credit utilization ratio would be 50%. Lenders prefer a credit utilization ratio below 30%.
Because they are so important, It is worth checking your credit reports and credit scores prior to applying for credit.
You can obtain your credit reports free of charge at least once a year from each of the three bureaus at the website AnnualCreditReport.com. You should file a dispute with the credit bureau if you discover errors that could affect your credit application. The law requires that the credit bureau investigate and respond to your concerns.
You might also be eligible to receive a free credit score through your bank, credit card issuer, or from one of many reputable websites. It is possible that it may not match the score used by the lender, but it could be close.
What to Do If Your Application is Rejected
You have the right to find out why your credit application was rejected. The lender will usually send you an adverse action email explaining why your application was rejected. If your credit score is too low, the lender will send you a letter explaining why.
If you wish to, You can contact your lender to ask for a reconsideration, perhaps based on new information. Or you can simply choose a different lender.
A letter stating adverse action may be helpful in pointing out areas of credit weakness, giving you the opportunity to improve it before applying again.
Is Applying for Credit Bad for Your Credit Score?
Applying for too much credit within a short time frame can damage your credit score and make lenders think you are in financial trouble. A sudden surge in credit applications may sometimes be ignored by credit scoring models. However, it is possible to appear that you are doing sensible things, such as shopping around for a mortgage.
Also read: 18 Best Reasons to Use Your Credit Card
What Is the Equal Credit Opportunity Act (ECOA)?
The Equal Credit Opportunity Act (ECOA), a federal law, prohibits lenders from discriminating against credit applicants based on race, color or religion, national origin, sex status, age, marital status, and other factors.
What Can You Do if You Believe You’ve Been Discriminated Against in Applying for Credit?
You can file a complaint against the federal agency if you feel you have been discriminated against by your lender. There are several agencies that share responsibility for the enforcement of the Equal Credit Opportunity Act. You can start by contacting the Consumer Financial Protection Bureau. You may also file a complaint with your state attorney general. You can also use the lender.
Bottom line
A credit application is a crucial step to obtaining a loan or credit card. It is possible that the lender will request lots of documentation and information. Therefore, it is important to gather this information in advance. Know that your rights are protected against discrimination and unfair practices under the law.
