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Loan Application and Credit Score Activity

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Loan Application and Credit Score Activity

For most of us, using credit during our lifetime is inevitable. Credit (borrowing money) is a necessary tool to help us achieve our financial goals. The key is to use credit responsibly and only to assist you in purchasing items you can afford. Part of using credit responsibly is to ensure you build a strong credit score so you are viewed as a credible and responsible borrower and you receive the lowest interest rate available. In this lesson you will evaluate three loan applicants and apply what you have learned about credit scores and credit reports to make a decision on whom to approve for the loan.

Activity

You are the loan officer at the bank or credit union and have received a loan request from three different customers who want to borrow $5,000 to purchase a car. Review the credit information for each applicant below and answer the questions that follow. The correct answers appear at the end of the article.

Applicant credit information

Questions

1. Which loan applicant do you think has the highest credit score?

  1. Applicant 1
  2. Applicant 2
  3. Applicant 3
  4. None of the applicants

2. What is the primary factor impacting applicant 1’s credit score?

  1. They haven’t applied for credit in the last six months.
  2. They have no credit history
  3. They don’t have an auto loan
  4. None of the above

Click here to see the credit score for applicant 1.


3. What is the primary factor impacting applicant 2’s credit score?

  1. They already have two credit cards
  2. Everything points to a strong credit score
  3. They already have the ability to borrow $7500
  4. None of the above

Click here to see the credit score for applicant 2.


4. What is the primary factor impacting applicant 3’s credit score?

  1. They have negative entries on their credit report.
  2. They are carrying a high balance on their credit cards. (only have $1000 left to borrow)
  3. They have a department store credit card.
  4. Both 1 and 2.

Click here to see the credit score for applicant 3.

Guidance for applicant 1

Apply for a major credit card with a low credit limit. If you are not approved you could look to have a responsible, trustworthy co-signor or open a secured credit card. A secured credit card is a type of credit card that is backed by a savings account used as collateral on the credit available with the card. Money is deposited and held in the account backing the card. The credit card limit will be based on both your previous credit history and the amount deposited in the account.

Guidance for applicant 2

Not much! Keep paying all of your bills and loan payments on time and don’t borrow money to purchase things you can’t afford or don’t need.

Guidance for applicant 3

First, be sure you understand what has caused your low credit score. Education and knowledge will help you build a strong credit score. Second, work hard to improve your credit by paying all bills and loan payments on time, not applying for additional credit until you have improved your score significantly, and carrying a lower balance from month to month. This may require you to revisit your budget and identify potential areas to reduce spending. You can build a strong credit score and be on a path to improved financial management.

Summary

Your credit score will be part of your financial profile for your entire life. You have a great opportunity to control your credit score and use it to your advantage to borrow money responsibly at a low cost. This will help you keep down the costs of important purchases, make your goals more attainable, and save you money. Think like a lender when you are evaluating how to manage credit. Paying all bills on time and not carrying large balances are two of the critical drivers leading to a high credit card score.

Answers

  • Question 1: 2
  • Question 2: 2
  • Question 3: 2
  • Question 4: 4