Master Your Card

At one time or another we’ve all gone through the process of getting a credit card or a loan. We fill out the application, answer any questions the lender may have, and cross our fingers. But what happens between the time they accept the application and the time they give us the decision?

Underwriting is a tough position because you’re making judgment calls about people’s ability to repay based on a three digit number and a few factual details. Nine times out of ten, you don’t know anything about this person except what’s on the credit report. The tough part is that people make mistakes and you don’t want to condemn them outright. On the other hand, history has a way of repeating itself.

So, back to the decisioning part of the process. It will vary from lender to lender, but typically each place has a specific matrix they follow. For example…

Credit Score                   Interest Rate

730+                                  6.24%
681-729                             6.79%
631-680                            7.49%
581-630                          12.49%
580 and lower                14.74%

At the credit union, our interest rates are based on the credit score. So the above matrix would help us quote information to a member. Now, the above sample is rudimentary and not accurate because I don’t carry the rates around with me, but you get the idea. The more risky your loan, the higher your interest rate is.

Now, there’s a second matrix we deal with that gives specific guidelines in terms of income, debt-to-income, net disposable income, and so on. That matrix is much more complex and certainly not something I could show from memory. However, I can tell you that just because you have a 730+ credit score, doesn’t mean that you’ll automatically be approved. The underwriters makes decisions based off of the two matrices and the client’s relationship with the company.

So, let’s say for example that I had a member who was applying for a loan and they made $32,000 a year, which is about $1230 a month, gross. Now, let’s also suppose that after taking the application, I discover that the member is at about 70% DTI (debt-to-income) and her NDI (net disposable income) is only around $300 a month - if we add this loan. Now, by our matrix, this would automatically be a decline. We don’t like to see DTI above 50% and we want the NDI at around $500 or more.

However, there are other factors that go into a decision. What type of loan is this? If it’s unsecured, the underwriters are inclined to stick as close to the matrix as possible. If it’s a long time member, or they’ve had loans with us in the past and always repaid on time, then they may try to work something out. Typically, they’ll lower the loan amount until the numbers work out. But, if this loan were a secured loan, then it may be workable. I was able to work a deal for a client that had a debt-to-income of 90%. That’s not usually something we do; however, I was confident that this individual was able to handle the arrangement and so I ran it up the chain for approval.

So, when you submit the application to the lender, it is handed over to the underwriting group. They calculate your debt-to-income, net disposable income, review your credit, and consult their matrices. Once that’s done, they are able to determine an approval, denial, or counteroffer.

But, this process is a little different when you’re talking credit cards. With those, the limit is based more on income and credit score.  Here’s a possible sample for a credit card limit.

Credit Score                   Limit

730+                         $5,000
681-729                    $3,000
631-680                    $1,000
581-630                    $500
580 and lower          Decline

I haven’t worked for a credit card company before, but a friend of mine has shown me similar examples. The numbers might be a little tighter and the limits a little less, but you get the general idea. Now, as your income increases, so do these limits. The above example may be for someone who makes $25,000 a year, but the next bracket up may be $50,000 which would jump the max limit to $10,000 as opposed to $5,000.

Again, there are other factors involved in the decision-making process, but the main focus when deciding what your limit is on that new card is your credit score and your income. My friend also tells me that when requesting a credit line increase from a credit card company, they will use a similar matrix as the one that was used in the initial decision; however, there is also an internal marker that comes into play. That means the company will review your history with them and use that in conjunction with the matrix to make their decision on the increase. You may have excellent credit, but if you’re always maxed out and never on time with payments, you’re not likely to get the line increase approved.

Credit Karma talked about this over at his blog, too. Kenneth used to work for a credit card company, so his information on credit card underwriting is probably stronger than mine. I’m going off of bits and pieces from a friend. I can tell you how we underwrite for loans all day long, but credit cards are a different animal. Be sure to read his post, too!

So, what are your thoughts on the underwriting process? Have you ever wondered how the process worked? Do you think it’s an unfair system? Why or why not?