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How One Credit Card Issuer Made Decisions: Ability, Stability, and Willingness to Pay

By , CardRatings Contributor
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Lending decisions vary from lender to lender. The purpose of this article is to offer some insight into how I thought about credit card and loan applications while I served as credit analyst for a major credit card issuer.

There is a lot of fuss surrounding FICO scores and credit scores in general. These scores need to be understood for what they are, a tool to guide companies in the management of risk. FICO is designed to predict the likelihood of a customer defaulting in the next 12 months. FICO is designed to replicate the types of decisions that people made in the good ol' days. It's important to consider the things that can affect your credit history. It is my view that people shouldn't look only to manage their FICO, but to actually exhibit the behaviors that make them a good credit risk. In other words, pay your bills on time and don't take on a lot of debt. Good FICO scores naturally follow with these habits.

So what do lenders REALLY look at? When I was a credit analyst, (yes, actual people do make some of those decisions) our decision-making process was based on the likelihood of the customer to pay back his or her obligations. The three questions we asked surrounded Ability, Stability, and Willingness to Pay. There was no magic formula; it was the overall picture of the consumer. First, I must establish that the applicant is capable of paying.

1. Ability: In short, can this person afford the payments based on the income information provided? Does he or she earn enough to manage this credit card account? Does the credit report show signs of additional expenses that aren't disclosed in the application?

There are many ways to evaluate a person's ability to pay obligations. Ability is primarily a function of income and the amount of debt. The point here is that the consumer should have enough money to make the payments consistently. So what does this mean to you? Based on your monthly income, will your credit card payments be less than 10% of your take home pay? This is a rule of thumb, and the less credit card debt you have, the better off you are in my opinion.

Your other obligations include payments for your home, car, student loans, other card debt, and any sales finance accounts. If your income isn't enough to cover these, expect to be declined for "insufficient income." Companies look to see if your debt level is in line with others in the income band listed on your application. Another question is will you be able to make these payments in an ongoing fashion? This leads us to the next category.

2. Stability: Does the applicant have a consistent source of income? Is he or she likely to in the future? This question is answered by information about the length of time someone has been on a job, lived in a home, and used credit.

I also look at whether applicants are renters or homeowners and what the nature of their employment is. Someone who has been in the same job for a long time has established consistency of income. If someone is relatively new to a job (less than six months), I would look to see if he or she has remained in the same industry to indicate growth of experience over time.

Living in the same place for a while can indicate that your current financial scenario has been similar for a longer period of time. Also, people who move around a lot may be more difficult to contact if they enter collections than those who stay put. Again, these are not "make or break" traits, they just help flesh out an evolving picture of an applicant. Now that I've established that the consumer has a relatively stable source of income that can support the loan payments, I need to know that paying on time is not an unknown concept.

3. Willingness to Pay: Regardless of income and cash flow, has the consumer paid bills in a timely fashion in the past? I had a friend who was the daughter of a multi-millionaire. In her own right, she was also a millionaire. She always complained about being declined for credit; after all, she could afford the payments.

What she didn't realize was that she failed test three. By being sloppy and not paying her bills on time, she sent lenders the message that she was irresponsible and probably wouldn't pay them on time either. Showing that you've made on time payments is the best way to demonstrate to a potential lender that you're likely to pay it on time as well.

Unpaid loans are obviously a loss for a lender, but late payments are problematic too. They are expensive because they require collection efforts. It's hard for banks to tell the difference between someone who occasionally mails a check late and someone who really can't pay, so an analyst will assume that the consumer had problems making the payment.

So think about your own Ability, Stability and Willingness to Pay. Would you lend to you? Do you have a history of paying your bills on time and receiving steady income? If so, you're probably a pretty good risk. As a follow-up to this article, in the next weeks, we will examine two potential borrowers and see how one loan officer would make a decision.

I would welcome your comments in our active credit card forum.

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  1. Doug
    June 14, 2019 - 12:04 pm
    I have a 800 FICO score, have no delinquencies on my bureau, pay my full balance monthly yet have been declined on a couple of credit cards that offer cash back rewards. Are banks now more inclined to determine how much money they can make by charging interest on balances carried than the actual ability to repay?
      Reply »  
    1. Brooklyn Lowery
      June 14, 2019 - 8:54 pm
      Hi and thanks for your question. I can't say for certain why you would be denied for a card; however, there are a couple of things you might want to consider:1. Even with your solid payment history and responsible credit card use, an issuer is still going to want to see a regular income stream. Are you currently employed or have you recently become employed after some time not working?
      2. What is your mortgage/rent payment like? Issuers want to ensure that your responsibilities are in line with your income and potentially leave some room to make payments on the credit card for which you're applying.
      3. How many cards have you applied for recently? If you've tried to apply for multiple cards lately, an issuer might be getting the impression that you're in need of some quick cash flow, which could make them nervous. Consider waiting for a while -- at least 3-6 months -- before applying for another card.Lastly, you can always call an issuer and speak with a customer service rep about your application. It's possible they will be able to offer some insight into why you weren't approved; they may also be able to reconsider your application right then and get you approved after all.Good luck!
        Reply »  
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    February 13, 2010 - 2:30 am
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      Reply »