Whenever you apply for any sort of credit like a credit card or an auto loan or a mortgage, the lenders are interested in getting to know that you are a credible borrower who will pay back the credit as per the terms agreed upon. In order to make this decision, there are three C’s of credit, namely capacity, capital, and character. It is essential, to learn these factors to ensure that you can make a good impression while looking for credit and dealing with debt.
Capacity
It indicates the term credit can be repaid based on your income, expenditure, and existing liabilities. Your debt to income ratio will be scrutinized by the lenders, which is the total amount of money that you spend on paying your debts in relation to the total amount of money you earn in a given month. The ideal credit utilization ratio that most lenders believe you should pay on your credit card should not exceed 36% of your income. It can include your housing cost, amount owed on other loans, credit card utilization, child support, and more to decide whether you can manage a new debt.
If considering approaching a credit card company to apply for a new line of credit, you should first compare if you have enough money each month to pay the credit card bill. If, for instance, your financial plan often struggles to meet the usual expenses within the month, then assuming more debt would only worsen the situation. Reducing balances on credit can help improve a debt-to-income ratio that can be helpful when applying for credit in the future.
Capital
Capital is your equity and assets that can be utilized in case of repayments of loans in case they are due. Sometimes, to be on the safe side, lenders will request for evidence of asset that you can use in case you are in a position where you lose your job or you are unable to make payments as expected. This is good because if your income was affected and you were unable to make the loan payments for some time then having capital reserves means that you are not as much of a risk.
Lenders are not likely to ask you to withdraw cash from retirement accounts or borrow on your home to pay off the rest of the debts; however, having available funds does enhance your credit score. Make sure to build up your capital base if you are considering applying for more credit by increasing your savings account balance. Merely having enough money for three months of personal living expenses can guarantee the lenders that you are a responsible person who takes the obligations assigned.
Character
Credit standing relates to credit utilization and history of managing credit and obligations in the past. Lenders will also look at the credit reports and your credit score to determine whether you have been regular in making your payments, whether you use your credit card responsibly and whether you have accounts that have been taken to a collection agency. It should be understood that occasional mistakes occur but consistent cases of late payment, missing payments or selectivity will be deemed negative.
Good credit character is easy as well: it includes having open credit accounts even if they are not used frequently, having a low credit utilization ratio, and only requesting credit where necessary. This not only includes credit cards, but also other types of credits such as auto loans and mortgages to prove that you are able to manage various kinds of tradelines. In case you have had credit problems in the past: time plus effort in paying accounts on time on regular basis can also assist in improving one’s credit rating.
Once you are conversant with the three C’s – capacity, capital and character, you will have an idea of what the creditors seek in their credit applications. Aim for good credit rating in these areas will come in handy when you need access to credit such as for major purchases such as a house or smaller things such as a credit card. It also means that by being keen on the credit rating fundamentals, one will also be able to attain his/her financial objectives.
Call now for expert credit repair services: (888) 803-7889
Read More:
What credit score is needed to buy a house?
Can you pay to clean your credit score?
How to wipe your credit clean?
How do I remove old credit history?
