6 Red Flags That Lenders Look for on Your Credit Report

Your credit report may not be something you think about all the time, but it becomes top of mind when you need a loan to buy a car or home, or otherwise want significant credit to make your dreams come true. 

While some obvious warning signs, such as bankruptcy, foreclosure and consistently late or missing payments send clear signals to banks and other lenders that you a risky candidate, there are several more subtle red flags that may cause your application to be approved at only the most undesirable terms – or even cause your application to be denied outright.

Once you're aware of the following six negative signs on your credit report, you can take steps to fix them to improve your chance of getting a loan or other credit opportunities.

1. You've recently opened a lot of new credit cards.

If you're the type of person who routinely opens new credit cards whenever they're offered – such as to get a 10% discount on a purchase – you may be cutting off your long-term financial options for a short-term benefit. Aside from the fact that too many "hard" inquiries from applying for new credit can lower your credit score, most lenders also have a cutoff as to how many credit applications they want to see before they approve you for more. This number can be as could be as little as two applications in a six-month span. Even if your credit score is decent, your application may still be automatically denied, as it indicates you may be taking on too much debt.

2. You often max out credit cards, and only pay the bare minimum.

Not only do lenders look at how many credit cards you have, they also look at how you handle them. Behaviors like running up a lot of debt and paying off only the minimal monthly amount tells them that you lack discipline and may be on your way to getting in over your head financially.

3. You use credit cards for cash advances.

Trading credit for cash sets off several red flags to lenders. That amount is immediately added to your debt, lowering your available credit and negatively impacting your credit utilization ratio (how much debt you owe compared to how much credit you have). This ends up lowering your credit score. Plus credit card companies routinely reevaluate existing customers' behavior by running your credit report information through their own credit-scoring systems – and most characterize cash advances as risky and penalize for them. This can result in your credit limit on your existing card(s) being reduced or cards being cancelled outright… which in turn sends a clear message to potential lenders that you're a credit risk.

4. An account of yours has been sent to collections - and you may not even be aware of it.

When you have an account that's severely past due, creditors will often sell the debt to a collections agency. This dire step has has multiple negative implications, including the fact that the original account appears on your credit report as a "charge off" (which signals the creditor has given up on trying to recover that debt), your credit score will be lowered, and the collection information stays on your credit report for seven years from the delinquency date. Even if you pay off the debt, your score will still be affected, although it should help demonstrate to potential lenders that you are trying to improve your financial habits. All of this can happen regardless of if you were aware of the debt or not, and even a small bill sent to collections can have a big effect. For example, if you move and you never receive a final utility bill because your forwarded mail never makes it to you, you're still legally responsible for that payment -- even though you didn't know about it. Similarly, if you're the victim of identity theft, you might not realize it, and undoing its impact will take time and effort.

5. You're a cosigner for a deadbeat.

When you co-sign someone else's loan, you automatically become responsible for that person's debts. If it's apparent that person can't or won't pay, lenders (rightly) assume that burden will fall on you – again, making you a risky candidate for a new loan or credit.

6. You've done a short sale on a previous home.

While a short sale, which is where the lender settles for less than the amount due on the mortgage, is considered a better closure for the seller (vs. foreclosure or bankruptcy), it's still a red flag to new lenders because of how it shows up on your credit report. The words "short sale" aren't on your report but information that clues them into what actually happened, such as the expressions"charge off" or "deed in lieu of foreclosure," do. If you had delinquent payments leading up to the short sale, that too will show for seven years. And even if your payments weren't late, it will show the full amount of the mortgage was never paid, and that has a negative effect on your credit score. (This lessens over time, so the further away from the short sale, the better.)

Stop your red flags from waving at potential lenders by changing habits that signal unstable or erratic financial behavior. That way you'll give creditors the green light to help finance your dreams.