Lenders take on different levels of risk when they give loans to borrowers, because there is always a chance that the borrower will default on the loan, which means that they will miss payments or just not pay it back. Even if a loan is backed by a purchase, like a mortgage, and they can take the house instead of paying back the loan, they still have to find a new buyer to make up for their loss. In the worst cases, when a loan is unsecured, the lender could lose the whole amount of the loan or have to go through a long, difficult, and sometimes expensive collection process that may or may not get them all of their money back.
Because of these things, all but the most dishonest lenders try to reduce their risk when they look at a potential borrower. A lender wants to give a loan to someone who shows every sign that he can pay it back. So, as a borrower, you need to show that you can be trusted and that you have the money to pay back your loan on time.
One of the best ways to gain a lender's trust is to show them that you have a good credit history. Your credit history doesn't need to show that you have a lot of money or a lot of credit; it just needs to show that you pay on time. Even if you have only paid off small amounts and kept small balances in the past, this shows that you are responsible with money and can be trusted. You have shown that you can be counted on to pay back what you borrow.
From a lender's point of view, good credit is more about habits and practises than about credit limits and account sizes. If you've always paid your credit card bill on time and have a steady income, you should be able to get a loan up to the limit that your income can support.
Your income is the second most important thing a lender looks at when deciding whether to give you a loan. Most lenders use a percentage scale to figure out if a loan is right for you based on your monthly income and the size of your monthly payment.
For example, if you make $2,000 per month and the possible mortgage payment on a new home would be $1,000 per month, you probably don't make enough money to pay for that mortgage. On the other hand, if you can show that your income might go up in the future, like if you get a promotion or get a higher degree, you might be able to persuade a lender to bet on your good future.
Note, though, that this is weighed against other financial obligations you may have, like loans or credit card balances, your age, and the type of work you do. If you are lucky enough to get the loan in the end, the lender may charge you a higher interest rate to make up for the "added risk." So, if you have bad credit, you might want to pay off your debts and raise your credit score before applying for a big loan like a mortgage.
