The Three Cs Of Good Credit
When a lender sizes you up to determine how much credit, if any, grant you, it usually look for the 3 Cs: character, capacity, and capital.
Character summarizes a lender’s sense of how responsibly you handle your credit obligations. Good character is established over a long period of time when you promptly pay your monthly due amount on your mortgage, student loans, and other personal loans. In the lender’s eyes, you also exhibit character if you do not take on too much credit for your level of income. By demonstrating a strong sense of character, you persuade the lender to trust that you will make a good-faith effort to pay your bills even if you run into financial hardship. Good character means contacting the lender if you have problem repaying a debt. This way, you can work together to establish as new repayment schedule.
Lenders assess your character in many ways. For example, they determine how many year you have lived in or owned or leased your home or apartment, and how many year you have held your job. The longer you have lived at one address or held one job, the more lenders feel comfortable with your character. If you have never before borrowed and have not established a repayment history, lenders have difficulty assessing your character.
Capacity measures your financial ability to assume a certain amount of debt. Lenders ask the annual income from your job, the value of your investment portfolio, and the income you earn in dividends and interest from those investments. Many banks set minimum income requirements that you must meet to qualify for specific dollar amounts of credit. In general, the longer you have earned a certain income, the larger your credit capacity because that income is considered fairly secure.
Lenders are required to consider all sources of income, such as alimony, social security, pensions, and consulting fees, in additional to wages. Though creditors are supposed to assess all source of income equally, they rely on income more than assets, which can fluctuate sharply in value and can be sold quickly. If you do not earn enough income to obtain credit on your own, you many qualify for a loan by having a friend or relative with a good credit rating cosign your loan. If you default, the consigner must pay back the loan. But if you repay your obligations faithfully, you might qualify for the credit line on your own over time.
Capital consists of the financial assets at your disposal to pay off debt if your character and capacity do not prove sufficient. Lenders include as capital stocks, bonds, mutual funds, real estate, collectibles, cars, and other assets that you could sell to raise money to meet your obligations. Even if you refused to sell them, lenders could seize these assets, sell them, and use the proceeds to retire your debt.
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