The Four “Cs” of Credit

While it might sound like science fiction, there really are organizations out there monitoring the way you behave. Further, those organizations’ pronouncements can have a very real impact on the quality of your life. Opinions expressed by these entities can affect your ability to rent a car, buy a car, rent a home, buy a home, get insurance and get a job.

Commonly known as Equifax, Experian and TransUnion. These credit reporting agencies base their findings on your credit score, which in turn is determined by the four “Cs” of credit; your character, capital, your capacity and collateral.

  1. Character

Usually referred to as your credit history, your track record of repaying debts is one of the key factors lenders consider when assessing the risk of extending credit to you.

They’ll examine your credit history to see if you’ve always paid your debts on time. They also consider how long you’ve resided at your current address, whether you move around a lot and how long you’ve had your present job.

Legal issues such as civil suits, bankruptcies, judgments and criminal convictions also come into play.

  1. Capital

Your ability to make a down payment will also be considered—depending upon the type of credit you’re seeking. For example, if you’re trying to buy a home, a down payment is almost always a necessity.

The amount will vary depending upon your circumstances and the type of loan you’re seeking. However, the more capital you have to reduce the loan amount, the less risk you’re asking the lender to assume. As a result, your loan application will be looked upon more favorably and you’ll generally be rewarded with a lower interest rate.

  1. Capacity

How much money do you make? What are your current debts? Do you have dependents? What are your current living expenses? All of these factors will figure into your capacity to repay a loan.

Comparing the amount of your income to your current obligations will help the lender determine how much room you have to make the payment required to service the loan. This is known as your debt to income ratio.

In most cases, if your debt—including your living expenses and the amount you’ll need to make your payments on the loan—exceeds 36 percent of your income, you might have trouble qualifying for the loan. With that said, your overall credit score, the amount of savings you have on hand and the amount of your down payment can often serve as mitigating factors in that regard.

  1. Collateral

Debt generally falls into two categories; secured and unsecured. Credit cards, charge cards, medical expenses and student loans are examples of unsecured debt. Car loans, real estate loans and other loans extended specifically for the purchase of an item of value fall into the secured column.

These debts are considered secured because you promise to turn the item over to the lender if you cannot repay the loan. In essence, the loan is “secured” by the property. This is known as providing collateral. In some cases, money or monetary instruments may also be pledged as collateral.

It All Boils Down to Creditworthiness

Ultimately, how you measure up to the four Cs of credit will determine your ability to borrow. This is why it is so important to keep your credit history as clean as possible. It’s also why you should get a copy of your credit report every year to check of discrepancies.

Additionally, it’s why you should avail yourself of the services of a company like Freedom Debt Relief if you ever find yourself in a situation in which your debt is threatening to become unmanageable. While debt relief companies can’t help you repair your credit per se, they can help you regain control of it.

If you work hard to improve your character, capital, your capacity and collateral, you might find easier paths to obtaining loans and new lines of credit. So, pay close attention to the trajectory of your life so you can correct any issues before they turn into problems.

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