Credit Utilization
When a lender is looking at someone’s loan application by hand (which is called manual underwriting), they need to closely examine the applicant’s credit report. Specifically, they’re interested in how the applicant uses their credit cards and similar revolving credit accounts. They do this by comparing the amount of credit the applicant is using on each account to the total credit they have available. This comparison helps the lender figure out if the person often uses a large portion of their credit limit. If someone frequently uses most or all of their available credit, this can be a sign they might not handle debt responsibly.
Credit reports that show credit card accounts with balances that are low compared to the credit limits generally suggest the person is a lower risk to lend money to. On the other hand, if the credit report shows many accounts with balances close to the credit limits, this suggests a higher lending risk. It points towards the possibility that the person might be over-relying on credit cards, potentially spending more than they can comfortably afford to pay back.
A particularly concerning sign for lenders is if someone has recently opened several new credit accounts and those are already near their credit limits. This could indicate that the person is stretched too thin financially. This concern is amplified if the person also has a history of late payments, as it suggests they are not managing their debt well.
It’s important to note that lenders are not required to look at trended credit data, which shows how the person’s use of credit has changed over time. For further details on the requirements for credit reports, lenders can refer to B3-5.2-01, Requirements for Credit Reports.
References
For more details, visit Credit Utilization of the Fannie Mae Selling Guide.