Your credit score only tells part of the story as lenders judge how likely you are to repay debt.
Credit card, auto loan, and mortgage approvals are heavily weighted by a potential borrower's "creditworthiness," or likelihood of debt repayment. It takes into consideration your financial obligations, credit score, and loan repayment history.
Even though different lenders use different criteria to determine creditworthiness, you can take steps to improve your own score.
Where Can I Find Information About the Three C's of Credit?
So, from the lender's point of view, what exactly is creditworthiness? Certified public accountant and member of the American Institute of CPAs' Financial Literacy Commission Richard L. Ward summarizes the importance of credit by pointing to the "three C's of credit": capacity, character, and collateral. What it comes down to is this:
When you borrow money, you are required to repay the loan in accordance with the conditions of the agreement. Of course, things don't always go as planned, so it's likely that you'll forget to pay or make a late payment. This can cost you late fees and harm your credit.
The term "capacity" is used to describe a person's ability to take on additional debt in relation to their current debt load. Creditors need assurance that you can and will pay your bills and other commitments. The ratio of your monthly debt payments to your income is one of the primary metrics used to determine your financial viability.
Character: For creditors, it's not so much a question of whether or not you're a nice person as it is of whether or not you have a history of being responsible with your money. Have you been a bad person? Do you handle past due accounts as collections?
Do you habitually pay bills after the due date?
The final part is collateral, which is your ability to back up any debt you take on. Some loans are secured, giving the lender the legal right to seize collateral in the event of default. However, even if you're taking on unsecured debt, the lender may still request to see your bank records or a list of your assets to ensure they have access to cash in the event of an income shortfall.
Credit card, auto loan, and mortgage approvals are heavily weighted by a potential borrower's "creditworthiness," or likelihood of debt repayment. It takes into consideration your financial obligations, credit score, and loan repayment history.
Even though different lenders use different criteria to determine creditworthiness, you can take steps to improve your own score.
Where Can I Find Information About the Three C's of Credit?
So, from the lender's point of view, what exactly is creditworthiness? Certified public accountant and member of the American Institute of CPAs' Financial Literacy Commission Richard L. Ward summarizes the importance of credit by pointing to the "three C's of credit": capacity, character, and collateral. What it comes down to is this:
When you borrow money, you are required to repay the loan in accordance with the conditions of the agreement. Of course, things don't always go as planned, so it's likely that you'll forget to pay or make a late payment. This can cost you late fees and harm your credit.
The term "capacity" is used to describe a person's ability to take on additional debt in relation to their current debt load. Creditors need assurance that you can and will pay your bills and other commitments. The ratio of your monthly debt payments to your income is one of the primary metrics used to determine your financial viability.
Character: For creditors, it's not so much a question of whether or not you're a nice person as it is of whether or not you have a history of being responsible with your money. Have you been a bad person? Do you handle past due accounts as collections?
Do you habitually pay bills after the due date?
The final part is collateral, which is your ability to back up any debt you take on. Some loans are secured, giving the lender the legal right to seize collateral in the event of default. However, even if you're taking on unsecured debt, the lender may still request to see your bank records or a list of your assets to ensure they have access to cash in the event of an income shortfall.
Tags
money