What are the 3 C’s of Credit?
When applying for a loan, it’s helpful to know what your Loan Officer will be looking at when making his or her decision. There are three areas they will review. These are the three C’s of credit: Capacity, Collateral, and Character.
Capacity in Credit: Definition
Your credit capacity is simply your ability to repay the loan. It can also be seen as your borrowing capacity of credit, whether through secured or unsecured products. Loan officers will review your monthly income and expenses to determine if you can afford to make the monthly payments for the kind of credit you’re interested in. They will consider open lines of credit as well. If you were to max out all the lines of credit available to you, would you still be able to make the payment or would you be over-extended?
Collateral in Credit: Definition
Next is collateral. Do you have something of value that you can use as collateral? Essentially you would be saying, “If I don’t pay this loan, you can take this piece of property and sell it to pay off the remaining balance.” For example, for a mortgage loan, your home is the collateral, and for a car loan, your car is the collateral. The lender may determine the amount they are willing to lend you based on what they think the collateral is worth. In other words, you can’t borrow $200,000 on a house valued at $75,000.
An un-secured loan is a loan without collateral. The lender is offering the loan strictly on the value of your good name.
Character in Credit: Definition
What is character in credit? The lender will review your credit history to see how you’ve handled debts in the past. Did you pay on time every month and pay the debt in full? Or did you settle any of the debt or declare bankruptcy? These questions aid in revealing how you are likely to handle debt in the future. In effect, your credit character is a measure of your intention to pay back a loan based on your past behavior.
Keep these three C’s in mind if you plan on doing any borrowing in the future. You will want to present your best self to your loan officer.