Closer Look at the 4 C’s of Credit

If you’re thinking about applying for a mortgage, a new home equity line of credit or maybe even a new credit card, there are several criteria to be aware of that bankers use to determine your credit worthiness, and then, if you do qualify, how to determine what interest rate to charge you. Taking a closer look, these lending criteria are known as the “4 C’s of Credit” — credit, collateral, capacity, and character.

These days the most important of all of the lending criteria among the 4 C’s of credit worthiness is the confidence in your ability to repay your obligations, or credit, as measured by your credit score. Commonly referred to as your FICO, in reference to the company that computes it (Fair Isaac), the FICO score range is anywhere from around 300 to 850. The higher your credit score, the better or more credit worthy you are considered to be. In most cases, a score of 750 or higher is considered the most credit worthy and qualifies most people for the lowest interest rates available.

There are many factors that go into determining your credit score. This includes your payment history, accounting for about 35% of your score, as well as the amount you already owe on your credit cards.  The length of your credit history is also a consideration, as well as whether or not you have recently opened any new accounts. The types of credit you have is also a factor. In general, it’s better to have a variety of different types of credit, including lines of credit, credit cards, and mortgages.

The next C, collateral, refers to the items that are being pledged back to a creditor should you default on your payments. The more collateral you have, the easier it is to get approval for a loan.

Collateral goes hand in hand with the next C — capacity. Capacity refers to your capacity or ability to pay off the debt obligation, which requires taking a closer look at the ratio of your income as a percentage of your expenses. To get a better idea of how well you qualify in this category, creditors will consider your income as well as how long you’ve been working in your current job. The availability or lack of employment opportunities within your industry will also be a consideration.

Character is the final C used to determine your credit worthiness. Your character is judged by many different things that help the creditor determine whether or not you’re likely to make good on your debt. Character is unquestionably a much more subjective criteria that is in a different manner than it has been used in the past. Credit worthiness these days tends to be measured almost exclusively on a numeric, purely measured basis.

Other character factors that are taken into consideration include looking at how long you’ve lived in your current home, whether or not you own or rent (owning is looked upon more favorably), and whether or not you have a checking account, money market or savings account.