At one point or another, you may need access to a line of credit. But you may be worried about getting approved, with many lenders holding back on their loaning practices due to economic shifts and times of uncertainty. Luckily, there are a few ways to boost your chances of approval when it comes to lines of credit. Here’s everything you need to know.
Prequalification for a line of credit is not a full-proof option for receiving funding, but it can certainly help. Next time you receive an advertisement in the mail or an email from the bank mentioning prequalification, don’t be too quick to toss out the benefit.
If a financial institution has prequalified you, this means they’ve taken a look at financial markers and have assumed you’d be a qualified borrower. That letter acts as leverage when actually applying with the lender for approval.
Though, it’s important to remember that this approval is based on generic markers they’ve found on you and may not be up to date. This is why it’s crucial that you also address other factors relating to your financial wellness, as mentioned below.
Improve credit score
One thing that many lenders will consider during the approval decision process is your credit score. A credit score is a number that represents you as a borrower. The higher the score, the more trustworthy of a borrower you are. On the other hand, the lower your score, the more incidents you’ve had, making you seem like a riskier borrower.
Core factors that affect your credit score include payment history, including late payments and skipped payments, along with the amount of debt you owe and account age. To improve the likelihood of approval, it’s important to raise that credit score as much as possible. While it can fall anywhere between 300 and 850, aim for a 700 or up in order to have better approval odds. In order to do this, you can work on making consistent on-time payments, maintain a lower credit utilization ratio, and avoid applying for too many new loans or credit cards all at once.
Lower debt-to-income ratio
A debt-to-income ratio (DTI ratio) depends on two important numbers, the amount of money you bring in and the amount of debt you owe. The lower your debt-to-income ratio, the better your approval odds will be. This is because your income is not tied up in satisfying debts, signifying you are able to afford a new line of credit.
In general, a suitable debt-to-income ratio is 43%, though lower is better in this case. A high DTI ratio can make lenders wary of extending your credit lines or permitting a new one because you’re already struggling with the debts you have. Adding an additional line of credit creates more risk for them and makes your financial wellness even worse.
Increase cash flow
Something that can improve financial health all around is increasing cash. While this can mean reducing expenses in order to have more money coming in and staying with you, it can also mean generating more cash flow. More cash will help to boost your net worth, improve your debt-to-income ratio, and give you a higher likelihood of approval.
This is because lenders want to make sure you have the funds it takes to repay loans. If you’re on a strict budget with very little money coming in without an immediate obligation, the lender does not have high hopes for you sticking to the borrowing agreement.
The bottom line
Applying for a new line of credit or extending a current one can be a daunting process. But luckily, there are a number of ways to improve the likelihood of approval. Whether it be boosting your credit score, chasing prequalification letters, or another method, improving your financial wellness will help to accomplish your financial goals all around.