Key Takeaways
- A credit application is a request for a loan or line of credit.
- The information included in a credit report helps the lender determine whether the borrower is a good candidate for a loan.
- You can usually fill out a credit application either online or in person.
- Lenders are required to notify you in writing and provide a reason if they deny your credit application.
- Revolving credit and installment credit are two primary forms of credit that borrowers can apply for.
Definition and Examples of a Credit Application
A credit application is filled out by a borrower and submitted to a lender to request a loan or other financing. A contractual relationship begins between the borrower and that lender when the lender receives a credit application.
The application provides the lender with important information about the borrower. Applicants will typically be asked to include the following information on a credit application:
- Address
- Phone number
- Social Security number
- Employer identification number (EIN) for business loans
- Credit references
The information provided on the credit application will make it easy for the lender to send the customer to collections or pursue legal action if the loan is granted and the borrower defaults on payment.
Note
Lenders often ask for credit references when a consumer or business applies for a loan. These references help the lender determine whether the borrower has a history of repaying their debts.
How a Credit Application Works
You’ll start the process of applying for credit or a loan by filling out the credit application and providing all the necessary information. Your lender will then most likely pull your credit report, and it will look at factors like your income and debt-to-income ratio, as well.
The exact underwriting requirements will depend on your lender. Underwriting is the process by which the lender determines whether it wants to extend credit. Your lender will use the information provided in the credit application to determine whether you’re a good candidate for a loan.
Filling out a credit application is easier than ever thanks to an abundance of online lenders. Technology often makes it possible for borrowers to fill out the application entirely online, and they can find out whether they’re approved within minutes.
If you're denied a loan, the lender must send you a letter explaining the reason why. All lenders are required to either provide a specific reason for the rejection or let you know that you have the right to request this information within 60 days.
The lender must inform you, as well, if it rejects your application due to the information contained in your credit report. It must give you the name, address, and phone number of the credit reporting agency that supplied the report.
Types of Credit
Most borrowers apply for two primary types of credit. Each can be a good option depending on your needs and your financial situation.
Revolving Credit
Revolving credit is an ongoing type of account, like a credit card or a line of credit. You'll receive a lump sum of money when you take out a loan, and you'll make payments until the balance is reduced to zero. You can repeatedly use and pay down the credit line over time with a revolving line of credit.
Your lender will set a credit limit when you're approved for a credit card. This is the maximum amount of money you can charge to the card. Your credit card will remain in good standing as long as you stay below the limit and continue making payments.
Note
It’s easy to let a revolving line of credit spin out of control if you're not careful. If you’re able, always pay more than the minimum balance and make all your payments on time.
Installment Credit
Installment credit is a close-ended credit account that you repay in monthly installments. You’ll either receive the money upfront or the funds will be applied toward an item you’re purchasing. The account is closed when you’ve finished repaying the installment loan.
Mortgages, car loans, student loans, and personal loans are all popular types of installment loans. They appeal to many borrowers because of the predictable payment terms and the option to refinance.
Try to improve your credit score as much as possible if you’re considering applying for an installment loan. A good credit score will help you earn the best rates and repayment terms on the loan.
FAQs
What Is a Credit Application? A credit application is a borrower's formal request to a lender for an extension of credit. Credit applications can be made either orally or in written form, as well as online.
What is a credit application for a car? ›
The credit application process is an essential step in the car-buying journey. It's where you provide your financial information to the dealership, allowing them to evaluate your ability to pay back a loan.
Why do companies require a credit application? ›
A credit application helps prevent delinquent payments and financial loss. An accurate and up-to-date credit application is one of the best ways to minimize risk. The application also allows the company to better implement their credit policy.
What is a credit application from a vendor? ›
A credit application allows the seller to make informed decisions about a customer's ability to meet credit obligations.
How bad does a credit application hurt your credit? ›
When you apply for a new card, the credit company may perform a hard pull of your credit report for review as part of the approval process. The inquiry on your credit history may lower your FICO Score but generally the impact is low (for most, this means fewer than 5 points).
Does a credit application hurt your credit? ›
The impact from applying for credit will vary from person to person based on their unique credit histories. In general, credit inquiries have a small impact on your FICO Scores. For most people, one additional credit inquiry will take less than five points off their FICO Scores.
Should I do a credit application for a car? ›
Key takeaways. Applying for preapproval can help you know how much you can afford and negotiate at the dealership. The higher your credit score is, the lower your interest rates may be. Lenders offer competitive terms to borrowers with good to excellent credit.
How long does a credit application last for a car? ›
Most lenders will accept a credit check that is 30 to 60 days old, and the amount of time depends on the lender. Even if your lender needs to run another credit check that affects your credit score, the benefits of shopping around typically outweigh the temporary effect on your credit.
How long does a credit application take for a car? ›
Most applicants get a credit decision in two hours or less (during normal business hours).
Who fills out the credit application form? ›
As the name indicates, a credit application form is a form that is filled out and completed by a business or a person who wants to apply for a line of credit with a lending institution.
Applicant Grants Creditor a Security Interest – If stated as a provision, a signed credit application can be used as a Security Agreement. A Security Agreement must be filed with a Financing Statement UCC-1.
Do credit applications call your employer? ›
If something is unclear, or you haven't worked at your current job long enough to have sufficient documentation, personal lenders can contact your employer to verify that you actually work there.
How are credit applications processed? ›
Once you fill out an application, a lender will pull a version of your credit report and credit score. They'll use this credit profile and other factors, like your income or debt-to-income ratio (DTI), to determine if you meet their underwriting standards.
What type of information does a credit application include? ›
- Asset and Debt Information, Employment Information, Other Income, and Other Obligations – These sections must be completed. Be prepared to provide additional supporting documentation (e.g. paystubs, W-2's, bank statements, etc.) to assist FCB in verifying information provided in these sections.
Why would a vendor issue a vendor credit? ›
You make an advance payment to your vendor, and the final bill amount comes out lesser than the amount you paid. The vendor keeps the rest of the money and issues equivalent credits in your name. You can track this in Zoho Books simply by recording this amount as a vendor credit.
What happens when you submit a credit application? ›
Shortly after receiving your application, the bank runs a credit check and verifies your identity. This step involves assessing your credit history and score to determine your creditworthiness. There are three main credit bureaus the bank might pull from Experian, Equifax and Transunion.
How long does a credit application take? ›
Getting approved for a credit card can be a fairly quick process — sometimes taking just seconds. Other times, it can be much slower, with issuers making you wait up to 30 days. Once approved, you'll typically receive your card within a week, though some issuers will get it to you earlier or later than that.
How long does a credit application last? ›
Hard inquiries fall off of your credit reports after two years. But your credit scores may only be affected for a year, according to credit-scoring company FICO®. “Although FICO Scores only consider inquiries from the last 12 months, inquiries remain on your credit report for two years,” the company says.
How long does it take for a credit application to be approved? ›
Credit card issuers are required by law to respond within 30 days, but online applications may be approved in a few minutes.
