Rising Credit Score but Rotten Credit Report? How That Affects Your Loan

Geoff Williams | U.S. News

If you have a dismal credit score, and you plan to apply for loan for a new house or car, you probably are doing whatever you can to bring your numbers up. You're paying your bills on time. You've been studying your credit reports and contacting the bureaus if you find any incorrect information. Maybe you've even taken out another small loan, just to show lenders that, yes, you've got this.

But you may not have this. Not yet, anyway. A high credit score doesn't guarantee a loan. If you are planning on applying for a loan, keep the following in mind.

Your credit history has more to do with getting a loan than your credit score. According to Fair Isaac Corporation, which created the credit scoring algorithm that most lenders use when making lending decisions, excellent credit is when your score is 720 or more. Good credit would be 690 to 719. Fair credit is 630 to 689. Bad credit generally includes scores from 300 to 629.

Credit scores and reports do tend to go hand in hand. If you have a high credit score, you probably have a positive credit report. But not always. You may have been a financial disaster up until a few years ago when you completely turned things around, and ever since, have watched your credit score climb.

And while a few years of good financial behavior may be enough to get you a loan, lenders may nevertheless be scared by your past.

"Ultimately, the approval process is different for each applicant and lender," says Carla Blair-Gamblian, a consultant at Veterans United Home Loans, a mortgage brokerage in Columbia, Missouri.

And whoever is looking over your loan may not be really looking at your credit history; instead he or she may be using a software program to make the decision.

"Many lenders use an automated system from Fannie Mae or Freddie Mac to get an approval status, so even if you have a great credit score but had really poor credit in the past, you may not still be able to get a mortgage loan," says Jeremy David Schachter, a mortgage advisor at Pinnacle Capital Mortgage Corporation in Phoenix, Arizona.

If you do get approved for a loan, it's then that the credit score kicks in and becomes relevant, according to Schachter.

"Whatever your credit score is at the time of the application is what's determined for the interest rates," he says.

Some items look bad on a credit report; others, don't look as bad. This won't shock you, but the longer you take to make a payment, the worse your credit report looks in the eyes of a lender. If your debt winds up in court, or you have a bankruptcy in your past, or a lien on your home, that could definitely derail your attempt to get a loan.

But if you have a lot of late bills in your past, but you always managed to get them paid within 90 days, a lender typically won't be too horrified by that.

David Hosterman, a branch manager with Castle & Cooke Mortgage LLC in Greenwood Village, Colorado, says many financing companies have specific guidelines when it comes to "derogatory credit items," and often the guidelines are tied to a specific time.

"For instance when it comes to home loans, in regards to an FHA loan, [lenders] typically require that a customer is two years discharged from a bankruptcy before obtaining new credit," Hosterman says. "For conventional loans – Fannie Mae and Freddie Mac – they typically require a four-year waiting period."

Hosterman adds that these are just guidelines, and if a customer can prove that a bankruptcy was due to extenuating circumstances, like being laid off from work, you might have a better shot of getting a loan with some lenders.

Other factors can come into play when it comes to your loan's terms. If you get an approval, and you have that high credit score, you're almost certainly going to get a loan with good terms. But you may not get the best terms possible.

When it comes to a mortgage, "interest rates are based on many different factors," says Schachter, adding that several of those factors include your credit score, what kind of property you're buying and how much your down payment will be.

If you are denied a loan. You can always apply for another loan with someone else. You have probably heard that applying for multiple loans can make a credit score drop, just what you don't need, but according to MyFico.com, Fair Isaac Corporation's website, if you apply for multiple mortgage, auto or student loans within a 30-day period, your score won't be affected. The company recognizes that you're shopping for a loan, and that it isn't as if you're going to wind up with three car loans and two mortgages. If you apply for multiple credit cards, however, that could drop your score.

If you keep getting turned down, however, then at some point you'll need to bow to reality and put off applying for a loan. Fortunately, time heals all financial wounds – eventually. For instance, a bankruptcy will be removed from your credit report, typically after seven years, if it's a Chapter 13 bankruptcy. A Chapter 7 bankruptcy will be removed after 10 years.

So you may have to bide your time while you wait for another year or two to go by, and your credit report and its history becomes less worrisome to lenders. The good news is that as long as you keep doing what you're supposed to be doing, and paying off your debts and staying on top of your finances, your credit score will likely keep going up. When you are eventually approved for a loan, the terms you get will probably be even better than they would have been had you received your money today.