June 25, 2007, 2:57 am

The Way Banks Look at You Part3: It’s a Baseball Game

by: The Financial Blogger    Category: Banks and You
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I’ve recently explained the 5 C’s of credit and demonstrate how banks will based their credit decision. You might not always understand why you are declined or why they would not lend as much money as you wish. I often say that credit is like a baseball game. Your about to hit and the bank is the pitcher.

 

Strike One: Bad Credit Management

The first strike is the most important as it sets everybody up for what’s coming next. Showing late payments on your credit bureau or having all of your revolving credits are maxed out to the limit will bring almost your application into the garbage bin.

 

Strike Two: High Total Debt Servicing Ratio

The second strike is related to your spending habit. Even if you make all your payments on time, banks are interested to dig a little further. They want to know how much you earn and how much is your minimal financial requirement. That includes payments on personal loans, credit cards, lines of credit, mortgage or rent, municipal taxes, heat and car leases. You can find more information on TDSR on this site.

 

By the same token, banks will be in a better position to determine your ability to save money. Are you spending all your money? Are you buying goods or investing with your money? What happens in your financial situation if interest goes up? All those questions will be answered by a simple debt ratio calculation.

 

Foul Ball: Cars, Furniture, Unjustified Income

You just hit the ball, it went far, but it’s no good as foul balls don’t count for much. Having for $150,000 of cars in your parking lot will surely get people to look at you while you are driving. Unfortunately, banks are not very interested in porches and BMW’s. Cars are depreciable assets that don’t count for much in the calculation of your net worth. Usually banks take the car value to offset a loan linked to it. If not, your vehicle won’t make them small.

 

I better tell you right away, expensive furniture worth nothing for the banks. Don’t even bother mentioning it. That’s a foul ball that never left the diamond. Another thing that won’t add much weight to your application is undeclared or unjustified income. If you don’t have valid proofs such as Notice of Assessment, pay stub or other official documents showing your income, it won’t be taken in consideration. This is why self employed and business owners have so much difficulty having loans. Their real income is not shown anywhere as they are writing off several personal expenses.

 

Strike Three: Negative or Not Liquid Net Worth

The final strike is having a negative net worth or being house rich. We recently heard about the new term “accidental millionaire”. Those are people that bought a house a long time ago and benefit from the recent boom. Their property is boosting their net worth. They are millionaire in term of net worth, but they don’t show the ability to save money. If they would have to sell their house today and move, they would have to pay the same price for a similar house. Having a high net worth is good, but having liquid assets is perfect.

 

However, if you don’t have any kind of assets, it’s even worst. When banks are calculating their risk, they look at the possibility that you have to sell all your assets to pay off your debts. If after selling all you have, you still have debts, they won’t be very tempted to lend you more money.

 

Batter’s out: Changing the rules

What? You are already out and you didn’t swing three times? This is no Baseball! You are right, this is the credit game and banks are not only pitchers, they are referees as well. Unfortunately for all of us, they decided that two strikes out of three are sufficient to decline a file.

 

Nonetheless, you can play with rules as well. If your batter is out after two strikes, you can always bring another batter that will hit a homerun for you. Having a strong co-applicant might erase your strikes and get another chance to hit the ball. The good thing about the credit game compares to Baseball is that the game is never really over.

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