What Do Credit Card Companies Look For?
Learn the comprehensive criteria credit card companies use to assess applicant risk and repayment capacity.
When applying for a credit card, applicants often wonder what factors credit card companies consider during approval. Credit card issuers evaluate information to assess an applicant’s creditworthiness and ability to repay. Their primary goal is to determine the likelihood of an applicant consistently making timely payments and responsibly managing new credit.
Your Credit Score and Credit Report
A central element in a credit card company’s decision is an applicant’s credit score and underlying credit report. Credit scores, such as FICO and VantageScore models, provide a numerical summary of an individual’s credit risk. These scores are calculated based on data within a credit report, which details an individual’s credit history.
Payment history is the most influential factor, indicating whether past credit accounts have been paid on time. This category often accounts for a significant portion of a FICO Score, around 35%. Late payments, bankruptcies, or accounts sent to collections can negatively impact this component, while consistent on-time payments demonstrate responsible behavior. Credit utilization, or the amounts owed, is another important factor, representing the percentage of available credit currently being used. Keeping this ratio low, generally below 30%, is viewed favorably by lenders as it suggests effective credit management.
The length of credit history also contributes to a credit score, reflecting how long accounts have been established. A longer history provides more data for lenders to assess borrowing behavior, though a good score is possible even with a shorter history if other factors are strong. The types of credit used, or credit mix, indicates an applicant’s ability to manage various forms of credit, such as revolving accounts (credit cards) and installment loans (mortgages, auto loans). New credit, including recent applications and newly opened accounts, can temporarily impact a score, as multiple inquiries in a short period might signal increased risk.
Credit reports, generated by the three major national credit bureaus—Experian, Equifax, and TransUnion—contain the data used for scoring. These reports detail accounts, current balances, payment statuses, and any public records like bankruptcies. The Fair Credit Reporting Act (FCRA) governs the collection, dissemination, and use of this consumer information, promoting accuracy, fairness, and privacy. Credit card companies analyze these reports to identify patterns of responsible credit use or potential red flags.
Your Financial Standing
Beyond credit history, credit card companies assess an applicant’s financial standing to gauge their capacity for new debt. Income is a consideration, as it directly demonstrates an individual’s ability to make required payments. Card issuers use this information, along with credit reports and scores, to determine approval and set appropriate credit limits. While applicants state their income on the application, companies may occasionally request verification through documents like pay stubs or tax returns, or use income modeling algorithms to estimate earnings.
Employment stability is another positive indicator, as consistent employment translates to a reliable income stream. This stability reassures lenders about the applicant’s ongoing ability to meet financial obligations. While not always explicitly verified, the duration of employment might be requested on the application.
The debt-to-income (DTI) ratio is a metric used to understand how much of an applicant’s gross monthly income is already committed to debt payments. This ratio is calculated by dividing total monthly debt payments by gross monthly income. Lenders use DTI to assess the remaining capacity for new credit obligations, with a lower ratio viewed more favorably. While standards vary, many lenders prefer a DTI ratio below 36%, though some may approve applications with ratios up to 43% or higher. A high DTI can limit eligibility for new credit or result in less favorable terms.
Applicant Information and Identity Validation
Credit card applications require personal information for identity validation and fraud prevention. Applicants provide their full name, current address, Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN), and date of birth. This data forms the basis for verifying identity.
This information prevents application fraud, where someone attempts to open an account using stolen or fabricated personal details. Credit card companies cross-reference provided data with various databases and utilize fraud detection systems to ensure the applicant is who they claim to be. The USA PATRIOT Act mandates that financial institutions verify the identity of individuals opening accounts to combat terrorism financing and money laundering.
Confirming U.S. residency is a requirement for most credit cards issued in the United States, and applicants must meet a minimum age, typically 18 years old. For applicants under 21, the Credit CARD Act of 2009 requires proof of independent income or a co-signer, ensuring they can repay the debt. Providing accurate and consistent information across all application fields is paramount, as discrepancies can lead to delays or rejection.