Why Two People With the Same Credit Score Can Get Different Loan Offers 

Do one thing: If you don’t get the terms you want on a new loan, you can shop around for a better deal.

It’s More than Your Credit Score

There’s a myth that your credit score, the three-digit number that serves as a report card of sorts for how you handle your debts, is the only factor considered when it comes to getting approved for a loan and receiving the best terms. For better or worse, that’s not the case. 

Empower Yourself By Knowing the Factors

When it comes to borrowing money from a financial institution, your credit score is only one piece of the pie used in a lender’s decision-making process. Several other important factors explain why two people with identical scores may receive (or qualify for) two different loan offers, including:

• Your income and employment history
• Your debt-to-income ratio
• Even the specific scoring model used

What’s Really Behind Different Loan Offers?

• Underlying Credit Report Differences. Two people can have a 750 credit score, but one might have a thin credit file or high utilization on specific cards while the other has a robust file with long-standing accounts with low utilization. Those underlying differences within two people’s credit reports can come into play when lenders take a deep dive into someone’s finances.

• Debt-to-Income (DTI) Ratio. Your DTI ratio is the share of your gross monthly income used to pay back debt, including the interest payment and the amortization of the principal. Lenders heavily weigh monthly debt obligations versus income. So those with identical credit scores can likely diverge if one borrower carries high auto or student loan payments, for example, and the other does not.

• ProTip. The DTI ratio is the top reason lenders use when rejecting loan applications, according to the Federal Reserve, accounting for more than one-third of all denials in the U.S. Why is it weighed so heavily? A high DTI can signal that someone’s income might not be sufficient to cover a new loan and all of the other current debts they carry.

• Different Scoring Models. Lenders use various versions of the two main U.S. credit scoring models, VantageScore and FICO, that are tailored to specific products such as auto loans, mortgages, or a credit card.
  • That means the score you see on a credit card statement may differ from the proprietary model a specific lender pulls when reviewing your loan application.
  • In reality, we all have dozens of different credit scores, with slight variations, that we don’t always have easy access to. 

• ProTip: If you don’t regularly check your credit reports:
  • You can get a free copy of those reports from the three main reporting agencies – Experian, Equifax and TransUnion – as often as once a week at AnnualCreditReport.com. Knowing what’s in your reports can help you gain a better understanding of your score.
  • Those who use the SavvyMoney tool have free 24/7 access to their credit report and credit score.     

• Dealer and Lender Markups: In certain situations, middlemen such as auto dealers sometimes add a discretionary markup to the baseline interest rate an individual qualifies for, which can change the final loan offer. Unfortunately, this happens more than you may think, which is why you should know your credit score before entering into a negotiation with a car dealer for a loan. 

Why Employment History Matters

Your employment history matters for loan approval because many lenders feel it demonstrates the following:

• Income stability
• Future earning potential
• A signal that you have a low default risk

It’s important to know that lenders look beyond a single paycheck and typically want to see steady employment spanning several years.

For the self-employed. If you are self-employed, have multiple income streams from side hustles, or are retired, some lenders may require additional documentation to verify your income or earnings.  

How to Improve the Likelihood for Better Loan Offers

There are a couple of things you can do to immediately improve your chances of getting better loan terms from lenders. 

Shop Around

For those with non-traditional income streams, there are ways to get loans with more favorable terms. Kyle Ray, founder and wealth manager at Ridgeback Financial Wealth in Georgia, says he has helped clients with non-traditional revenue streams find loans outside of those offered by national financial institutions. The key? You’ve got to cast a wide net.

“There are options out there,” he says. “You need to look for independent lenders, either by asking friends for recommendations or doing an online search.” Look for financial institutions that may be more willing to work with those who don’t fit into traditional financial molds.

Manage Your DTI

When it comes to your debt-to-income ratio, working to pay down some of your debt is another way to improve that piece of your financial life. Consider these steps: 

• First, work on paying down your highest-balance accounts; 
• Continue to tackle smaller balances with fixed monthly payments; 
• Avoid any new financing requests for at least 90 days before applying for a big loan;
• Ask for a credit limit increase on your revolving accounts (then don’t use the additional room).

With reporting by Casandra Andrews