Credit Report Q&A

Tighter Lending Practices

Dear myFICO,

6 months ago I went to a local car dealer to buy a new car. I qualified for a good loan through the dealer but decided to wait until I could put more money down and lower my monthly payments. Last week I went to the same dealer only to find that I no longer qualify for the loan. My FICO score has not changed, so why am I no longer qualifying for a loan I was approved for 6 months ago?

Luis
Trenton, New Jersey

Dear Luis,

If your FICO® score hasn't changed and you are putting even more money down than 6 months ago, then it's likely that the auto lender has tightened their lending practices. Through no fault of your own, you may be experiencing what the media is calling the "credit crunch". Credit that you would have qualified for 6 months or a year ago may not be available to you today.

Many people believe that tighter lending practices are isolated to the mortgage industry, but as you're seeing, lending practices are tightening up across many industries. Auto loans, credit cards and home equity lines of credit are just a few areas that have seen credit increasingly harder to come by. Most of the financial institutions that offer these loans are re-evaluating their lending practices. Typically, higher risk loans bring higher profits for lenders as they charge higher interest rates for these loans. Today, we're seeing a big movement towards accepting only lower risk – lower reward loans.

As the credit crisis plays out, many financial institutions are moving toward the low risk side of the equation as they try to minimize losses associated with loan defaults. This is not to say that 6 months ago you would have made all of your payments on time and today you wouldn't. It's simply the case that many financial institutions aren't willing to take on much risk at all, even if it's only perceived risk. It's important for you to realize that the actions that these financial institutions are taking right now aren't targeted against you personally.

As the economy begins to turn around and credit becomes more available, you should be able to qualify for your auto loan. If you can, you should definitely continue the approach of saving more to put down for your new car – this can really lower your monthly payments. If you need a new car sooner, you might call around to other lenders like your bank or local credit union. You may find that these financial institutions are perfectly willing to offer you a good rate on an auto loan. In the mean time, continue to keep your credit healthy by paying all of your bills on time, keeping your credit card balances low and seeking new credit only when you really need it. The lending pendulum is bound to swing back and you will no doubt be behind the wheel of that new car soon.

Sincerely,
myFICO Team

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