Credit Criteria Definition

What are the credit criteria?

Credit criteria are the factors used by lenders to determine whether or not to approve a new loan. Although the criteria specific to different lenders may vary, many assess your credit score and income as key factors. A lender will approve or deny a loan based largely on how much you earn and what your credit report.

Key points to remember

  • Credit criteria are the factors used to assess the strength of a new credit application.
  • Most banks use a similar set of criteria to estimate borrower creditworthiness.
  • Certain factors, such as ethnicity or religious beliefs, are prohibited by law from being considered in such decisions.

Understanding Credit Criteria

The key criteria lenders look at strongly reflect the metrics used to calculate your credit score. The five key credit score factors to understand:

These factors, brought together by the three major credit bureausare then introduced into a credit score model that weights them by importance to produce a credit score. The FICO score is the most widely used, but there are also other credit scores from different providers, but FICO is the most frequently used, informing about 90% of all loan decisions.

Although they may seem complex, the underlying intention of credit criteria is simply to estimate the solvency of the borrower. Applicants with a history of regular and full payments and relatively infrequent credit inquiries will be favored.

Similarly, most credit-scoring models will prefer applicants who have stayed well below their overall credit limits (using more than 30% of your available credit is frowned upon) and who have a long track record of responsible manner. In contrast, applicants who have recently opened several new credit accounts or who have missed payments in the past will be rated lower by most credit models.

30%

The percentage of credit utilization considered acceptable by the credit bureaus

Special Considerations

Beyond reviewing these common credit criteria, lenders will sometimes also make due diligence. In doing so, they are often guided by what has come to be known as “the five Cs of creditwhich is a familiar framework for assessing a borrower’s creditworthiness. These include the character, capacity, security, principal and terms of their borrower loans.

Ultimately, a lender is free to consider any or all of these factors when deciding whether or not to approve a loan. However, it is important to note that due to rights legislation such as the Equal Credit Opportunity Act (ECOA), factors such as the borrower’s race, color, religion, national origin, gender, marital status, age, and acceptance of public assistance cannot be taken taken into account when making credit decisions.

Example of credit criteria

Sal applies for a personal line of credit from an American bank. As a recent immigrant, he is eager to establish his personal credit history in order to qualify for a mortgage later.

When preparing his application, Sal begins by researching the factors that are important to the bank when evaluating new loan applicants. He notes that most banks prioritize factors such as the reliability with which the borrower has made payments in the past, the overall level of credit used by the borrower, and the length of time the applicant has been a credit customer.

Luckily, Sal had planned ahead to ensure his candidacy would be as strong as possible. When he arrived in America five years ago, he enlisted as Authorized user of his American cousin’s credit card. By making sure he and his cousin paid off their credit card in full each month, Sal was able to demonstrate a reliable payment history while building a history as a credit customer.

Since then, Sal has been able to get his own credit card and has been careful to stay within his credit limit while continuing to make his payments in full and on time. By understanding and planning ahead, Sal is cautiously optimistic that his loan application will be accepted by the bank, due to the strength of his credit criteria.