Credit Score Factors: Access to Credit

One of the most significant aspects of a credit application comes down to a question of whether or not the applicant already has access to the funds necessary to pay off the loan itself. A borrower that already has $100,000 available in their accounts is much better able to pay off a mortgage than one who doesn’t have any. The same rational is then applied to available lines of credit.

A loans applicant with $100,000 available in existing lines of credit will be better able to pay off a mortgage than an individual without, because they can tap on the line of credit to handle unexpected short-falls in cash. What’s more, if an individual already has credit with the lender, it improves their ability to take out the new loan for two reasons. Firstly, the borrower has already shown themselves to be a good customer to the lender’s institution, and the lender will be more willing to do business with a familiar customer.

Secondly, if the lines of credit are already under the ownership of the lending institution, it means that the customer is already committed to that institution. By having the line of the credit with the same institution as the new application, the lender will have the assurance that they will have access to the credit should the individual completely default on the loan. While this latter point is fairly harsh, it’s important to remember that this is how a bank or lender will view the risk management process.

One of the most common ways for an applicant to make a significant improvement to their credit score is to pay off existing lines of credit, overdraft, and credit card accounts so that they free up access to existing credit. In doing so, the borrower is also showing an ability to pay off their existing obligations by improving their payment history.

Another strategy is to temporarily expand credit lines by applying for new credit cards, and then proceeding to consolidate them into a line of credit soon after having maxed them out. By doing this, the individual application gains access to credit through the cards, and after repayment, the line of credit itself, effectively doubling the impact of this segment of their credit score under the umbrella of a single set of transactions.

While the access to credit section has a great deal of flexibility to help an individual build up credit, it is important to recognize that all of the strategies under this segment pertain to long-term credit building, and require an individual to take a short-term decline in their score by applying for the additional debts themselves. That being said, by taking out these loans, the individual is placed in a much stronger position in the long term, and can see themselves brought up from 0-credit to prime status in as few as 2 years, depending on their financial planning abilities.