When you apply for a mortgage or cash, the financial institution will start analyzing your creditworthiness. It depends on this research what amount, and whether at all, it will be willing to share with you. What reduces creditworthiness and why? How to prevent this?
Creditworthiness is the highest amount possible, which according to your institution you are able to pay back with interest on time. Importantly, because banks estimate it based on their own, individually set algorithms, each of them will offer you different maximum funding amounts. On the other hand, there are some factors that are negatively perceived by all institutions and result in reduced creditworthiness.
1. Low scoring
One of the most common reasons for reducing creditworthiness is low scoring. This is not particularly surprising, because it is a kind of applicant credibility test, which includes the analysis of many related factors. To assess the risk of lending to a given client, a bank analyst takes into account, inter alia, his:
- amount and source of earnings,
- current credit history,
- liabilities held,
- or even marital status.
Low points may result in a lower level of the DTI (Debt to income) ratio, i.e. the ratio expressing the ratio of the sum of monthly liabilities to net income. According to the recommendations for banks, the total monthly charge on repayment of loans and borrowings may constitute 50 or 65% of income (the higher limit applies to earnings above the national average). Therefore, if you earn $ 2,500 and the analyst lowers your DTI from 50 to 40%, then the monthly installment of the commitment may not be maximum $ 1250, but $ 1000 This will translate into a noticeable decrease in creditworthiness.
2. High expenses for household maintenance
To see if you can actually handle the repayment of the new liability, the bank will analyze your monthly income and expenses. Your credit standing will obviously be higher the more you earn and spend less.
For the bank, the most important item on your spending list is household maintenance costs. The problem is that he will not analyze them in detail, but will calculate them on the basis of the economic indicator published by the Central Statistical Office. If you live and live on your own, the bank will assume that your total cost of living is around $ 1,200. Each subsequent member of the household, depending on the institution, will increase it by 600 to 1000 dollars. This approach is beneficial when you and your partner work without having children; if you create a family, each child will increase costs and reduce creditworthiness at the same time.
3. Employment based on a specific task contract
In the case of civil law contracts, banks have different models for assessing the credibility of such income. There are banks that will accept 100% of such income, but unfortunately these are few cases. Most banks will reduce the indicated income by 20% or even 50% due to the costs arising from the civil law agreement. Still other banks will require the submission of last year’s income (PIT or salary receipts) to assess income stability. The lower value will be accepted for creditworthiness testing.
Unfortunately, ENG Bank has for some time stopped receiving income from civil law contracts for creditworthiness testing. Income from a civil law contract can only be treated as additional income and will be taken into account by ENG Bank only in the event of a deviation from accepted procedures.
4. Taxation of business activity not liked by banks
If you run a business and settle you based on a registered lump sum or tax card, you are in a difficult position as a borrower. All because of the unfavorable way of estimating your financial possibilities.
In the case of a lump sum tax is paid on revenues, which is why they constitute the basis for calculating creditworthiness. Banks include only a small part of them – depending on the type of activity, usually 15, 20 or 30% of average monthly revenues. So if you use a lump sum, the estimated value will probably be much lower than the one that actually stays in your pocket.
The tax card is even less favorable than a flat rate and actually closes the road to a mortgage or other major liability. If you use it, the bank will multiply the tax rate you pay by the set factor and calculate the average net monthly income on that basis. Since this ratio is usually only between 5 and 15, your credit standing will be really low.
5. Multi-component remuneration
In many enterprises, there is an incentive remuneration system in which employees receive a salary consisting of the so-called basis and variable part. The basis is nothing other than the unchanged amount of salary paid each month. The moving part may consist of commissions, bonuses or overtime benefits.
If you operate in such a system, be sure to check how your bank views this issue. Some institutions only use a salary basis for calculating income, while others accept a variable part as well, provided they regularly pay similar amounts.
6. Salary in a foreign currency
Since July 22, 2017, when the Mortgage Act was amended, banks may only grant clients financing in the currency in which they receive remuneration. So if you earn in euros, you can apply for a loan in European currency, and if in dollars – only in dollars.
No recommendations are used for cash loans and loans are granted in $ despite income in a foreign currency. Unfortunately, offers for people with foreign income are very limited. Most banks require that the remuneration affect the account in a Polish bank. Despite everything, e.g. Sweet Savings Bank will grant a cash loan to the applicant, who obtains income in foreign currency and the remuneration is paid to ROR at a foreign bank.
7. Credit obligations in foreign currency
If you are already repaying a foreign currency loan, this fact will affect your creditworthiness more than if it was an analogous $ liability. The bank, wanting to protect itself in the event of an unfavorable change in the exchange rate, will increase the value of the calculated loan installment. Depending on the institution, this can be from a dozen to up to 100% higher!
8. Late repayment of liabilities
Negative impact on the assessment of your application may also have delays in repayment of existing obligations. Slips not exceeding 30 days are generally not taken into account, but if they happen to you regularly, you can expect a reduction in your creditworthiness. Serious delays in repayment may not result in obtaining a lower amount of credit or loan, but in automatically issuing a negative decision. Remember that banks, especially when applying for more funds, verify entries in your credit history up to 5 years back.
9. Many loans repaid at the same time
If your credit history is long and filled with positive entries, the bank will perceive you as a reliable debtor with whom it is worth establishing cooperation. However, if you incur a large number of liabilities in a short time, you risk being considered a customer prone to excessive debt. In this case, you may have a problem getting even a consolidation loan that would allow you to organize your financial situation.
10. “Forgotten” revolving limits and credit cards
A credit card and revolving limit can be convenient and quite cost-effective ways to finance expenses. However, when you apply for a larger loan, you should opt out. As long as you have active contracts for the use of such products, the bank will consider them as liabilities that reduce your creditworthiness. Regardless of whether you use them regularly or even forgot about their existence, each will be treated as a monthly charge of from about 4 to even 10% of the value of the limit granted.
Credit cards or limits do not need to be closed completely, we can reduce the credit limit or declare a desire to close the commitment before signing the loan or loan agreement.
11. High age of the borrower
Virtually every bank, officially or unofficially, applies upper age limits to potential borrowers. This is most important when entering into more serious obligations, such as a mortgage. Banks grant it for a maximum of 35 years, but at the same time require that the last installment be repaid before completing – usually – 70 or 75 years of age. This is important from the point of view of calculating creditworthiness, which is the higher the longer the loan period. For example, if you are 45 or 50 years old, you can take a loan for a maximum of 20-25 years, which translates into a correspondingly lower capacity.
Remember that when you apply for a loan with your partner, parents or anyone else, the bank will take into account the age of the oldest co-applicant. For example, if it amounts to 60 years, you can count on being granted a relatively short loan term of several years.
The bank may convert the so-called the replacement rate, i.e. if the duration of the loan exceeds the retirement age, the analyst will calculate how much you will receive your pension and thus may reduce your creditworthiness.
12. Choice of decreasing credit installment
Your creditworthiness is also influenced by the parameters of the product you are applying for. The loan amount, funding period or interest rate are the elements that determine the amount of monthly installments. These, in turn, are the basis for calculating your ability. For liabilities such as a mortgage, the amount of monthly payments also depends on the type of installments chosen.
If you apply for a home loan, you can choose equal or decreasing installments. Both types of payments consist of capital and interest, but are based on different methods of calculating their amount. By choosing equal installments, you will pay the same amount each month (this may change due to changes in interest). Decreasing installments operate so that they have an unchanged size of the capital part and an increasingly lower value of the interest part. Therefore, at the beginning of loan repayment, their amount is the highest and it gradually decreases with each subsequent month. This is financially advantageous because it means lower total loan costs. On the other hand, the bank calculates its creditworthiness based on the size of the first installment – in this case it is higher than for equal installments.
13. A large number of credit inquiries
When you apply for a loan, the bank will report to BIK with a request to provide your credit history and scoring. It is important because each such query leads to a slight decrease in your score. If you apply for a loan from several different banks in a short time, this will significantly affect your creditworthiness. What’s more, a large number of applications can even lead to your application being rejected automatically. This is due to the fact that BIK immediately registers every query, but does not immediately note the granting of a loan. Another bank in which you apply may assume that one of the queries listed in the system has ended with the conclusion of a loan agreement.
These issues are important above all when applying for a larger amount of financing, for example under a mortgage, cash or car loan. If you apply for a non-bank loan, the loan company will carry out a simplified examination of your financial situation. It will check the information they have collected about you: BIK and debtors’ registers, and when you apply for a larger amount – it will also look at your income and living costs.
Due to the narrower scope of the study and readiness to accept individual, slightly larger delays in repayment, non-bank products are slightly more accessible than credit ones. With the exception of free 30-day payday loans for new customers, they are also more expensive.