If you have an existing debt, then it is important to know that it will have a straight effect on your credit report. Any borrowing, be it in the form of loans, credit card debts or mortgage, the debt gets easily recorded on your credit file. Your borrowing behaviour recorded in these files is observed by the credit card providers and future lenders before giving you credit. It is their way of checking whether you will be able to repay their money or not.
The credit file contains not only the borrowing details, but also marks repayments, missed payments, extra borrowings and other small little details. This helps them analyse your borrowing behaviour and regularity of payments. It helps them to keep a track of the applicant’s fluid borrowings like flexible loans and credit card activities. As they can track your financial activity and check your monetary management, they can easily decide whether to offer you the loan or not.
Things lenders consider while giving loans or credits:
Balance-to-limit ratio: In simple terms, the ratio of your balance to your credit limit gives an idea about your borrowing and repayment habits. This ratio increases when you spend more and come closer to your credit limit. When you make repayments and minimise your balance, the balance-to-limit ratio gets dropped down. Most of the lenders give a positive response to customers with a low balance-to-limit ratio.
Debt-to-income ratio: It is the ratio of the amount of debt to your monthly income. Your income would not be listed in the credit file and so, the providers ask for it as an additional information required during the application process. By using the data of your credit file and your salary information, they calculate your debt-to-income ratio. It is done by making the sum total of your debts and loans and then dividing it by your monthly salary without tax deductions. If this ratio is low then the lenders feel that you are capable of managing the finances and so, will offer you the best credit deals.
Both these things are checked by lenders to safeguard their business. By these aspects, they can easily check whether you will be able to make consistent repayments. By studying your monetary patterns, they can actually accept or reject your application. To be on the safe side, you should maintain a low ratio in both cases. If you have an idea about both these factors then you can either save yourself from application rejection or take measures to improve your credit score.
For more on credit cards, read our guides that give in-depth knowledge of the credit card industry.