Applying for credit can be a bit unsettling.  Applicants know they are going to be judged.  They may feel like they are asking for a favor.  They may fear being turned down.

Actually, banks want to loan money to individuals and businesses.  In fact, they must do so.  The interest on loans is the major source of profitability for banks.  In a sense, banks need borrowers more than borrowers need banks.  From the bank’s perspective, a trustworthy borrower is a valuable asset.

Of course, individuals and businesses want to borrow money, as well.  They borrow for home mortgages, to buy vehicles, take vacations, home improvements, personal needs, commercial ventures and many other reasons.  Most people could not afford "big ticket" items without having access to credit.  So credit usage can be very beneficial when handled properly.

Applying for credit is a relatively straightforward process!

The first step is to complete a credit application.  The form asks for basic name and address information.  Information about where the applicant works, previous credit experience, income and other financial information also is requested.  Banks take applications in person, by mail, over the phone and online.

After receiving the application, the bank will check the information for accuracy.  In addition, banks typically obtain a copy of the applicant’s credit report from one of the major national credit reporting agencies.  These agencies (sometimes called credit bureaus) maintain files containing information about past and present credit usage and other financial data on most borrowers.

It is becoming increasingly common for banks to use a credit scoring system to rate applicants.  Under these systems, points are added and subtracted for certain aspects of the information in the application and credit bureau report.  Credit scoring systems are becoming increasingly accurate in predicting the likelihood of repayment.  Credit scores may be used to place the applicant into one of three categories:

• Applicants with scores above a certain optimum threshold are granted credit with the most favorable conditions such as the lowest available interest rates.
• Applicants with scores below the bank’s minimal threshold may be turned down.
• Applicants with scores in between the optimal and minimal levels may or may not be approved.  If approved, they may be required to pay a higher interest rate than the most highly rated applicants.

The decision to grant credit is usually made in a day or two.  The funds may be deposited into the applicant’s checking account.  Or the bank will issue a check in the amount requested.  Or they will issue a credit card if that was the type of credit for which the applicant applied.

People with good credit histories should be proud of their ability to use credit wisely, pay back on time and have access to credit in the future should they need it.  How can you assure that you will have the type of credit history that will put you in the top tier of applicants?

• Be conscientious about your credit usage.  Always make sure you make loan payments on time and in at least the minimum required amount.
• Protect your credit history.  Federal law requires that consumers be informed of the information in their credit bureau files.  You should request this information periodically; perhaps every two or three years.  You should also do so several months before applying for a major loan such as a home mortgage.  Errors in the files must be reinvestigated and corrected when requested by the person on whom the file was developed.  Challenge all errors and omissions.
• Always shop for the lowest APR.  This is the interest rate quoted as an annual percentage rate.  Recall from above that banks segment and assign interest rates for borrowers according to credit scores.  Getting the lowest available APR means you are consistently being associated with the best applicants.

Banks want loans to be paid on time with interest.  So banks are careful about their lending decisions.  People who have steady incomes, have shown they can handle credit in the past and have a good reason for wanting the loan are most likely to be able to borrow from a bank.

What can people do who have a poor credit history?

• Contact the national credit bureaus and obtain copies of the information in your credit bureau file.  Verify the accuracy of the information.  Have erroneous information reinvestigated.
• Save up to repay past creditors wherever possible.  Delayed repayment looks a whole lot better than past due outstanding debt.
• Do not take on additional debt unless absolutely necessary and only when absolutely certain that repayment can be made on time and in full.
• Do not make purchases on credit solely to rebuild credit worthiness.
• If credit is needed, consider secured credit.  This is credit backed up by collateral or a co-signer.

Borrowing requires effective management of your money on a day-to-day basis.  The best way to do that is through careful budgeting.

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