At this point, I would open an Excel spreadsheet template and enter borrower information. The spreadsheet would ultimately calculate the borrower’s debt-to-income (DTI) ratio, a calculation that shows the borrower’s available income to pay for the new debt.
To fill-in the file, I would enter the borrower’s income at the top and monthly payments for every loan on the credit report. For any installment loans like a student loan, mortgage, or auto loan, I would enter the scheduled monthly payment amount. For credit cards, we would use the minimum monthly payment as reported to TransUnion, the credit bureau my bank used to access applicant credit reports.
This was not always a black-and-white process, and I had to use my best judgment in some cases. If the account showed on the applicant credit report as an “authorized user,” I would assume the applicant was not required to make payments and would remove the loan from the calculation, improving their ratio. However, I did have to trust the credit report. Banks and credit card issuers typically update credit reporting monthly, so the timing of the most recent update could impact the number used for the debt-to-income ratio.
For example, if you have a card that you pay off in full every month, it does not have a zero balance all month every day. Whatever the balance was on the day the account was last reported to TransUnion was the number I used for the calculation. While you know you don’t carry a balance or make monthly payments on the card, I had to treat it as if you were carrying a balance.
At the bottom of the spreadsheet, I would enter in the new loan payment amount. This gave me the ability to look at the debt-to-income both without and with the loan. We had specific DTI requirements and used our best judgment on top of those rules when approving a loan.
Past behavior is the biggest predictor of future results
Just because a loan met credit score and DTI requirements did not mean the loan was automatically approved. My job was to act as the bank’s last line of defense against bad borrowers and bad applications.
My active time approving loans was in 2007, at the very start of what would turn out to be the nation’s second worst economic crisis in history. The Great Recession proved why loan application rules are so important. They were not just to protect the bank from losses, they were to protect borrowers from entering into financial agreements they could not afford or were not in their best interest.
How did we make this judgement? Ultimately it did come back to the credit report, but not the credit score. My boss and trainer at the bank told me that “past behavior is the biggest predictor of future results.” If someone had a history of missed and late payments, they would probably keep doing that in the future. If they had a history of on-time payments, they would probably keep doing that in the future. By finding a trend and a pattern, I would best predict how a loan would turn out.
Keep this in mind every month when you get bills in the mail. A late credit card payment may not seem like a big deal today, but that late payment will still be on your credit report six years from now. That small decision six years ago could be what disqualifies you from a buying a home or getting the best possible rates.
Let your behavior show bankers that you are a safe bet. If you always make on-time payments and keep credit card balances low, you have little to worry about. If you do have mistakes on your credit report today, make this the month when you change the trend. You can’t fix it overnight, but you alone have the power to improve your credit.
Your actions today become your history tomorrow. Build the best credit history to get access to the best loans, rates, and products. If you do, your future self will thank you.