Personal Finance - 5 Cs of Credit

Conditions

Conditions (interest rate, amount of the loan, etc) can help give the lender a desire or not to give the borrower credit. The conditions tell the lender what the borrower will use the money for (Ex. lenders will be more inclined to give a mortgage or car loan since they have a specific purpose instead of a general loan that can be used for anything).

Character

AKA Credit History. The borrowers history paying back loans - were they on time? Look at credit reports which contain information on collection accounts, judgments, liens, and bankruptcies. This is also used by FICO to make a credit score which is looked at first for a quick glance of creditworthiness before investigating the credit report.

5 Cs

Used by lenders to determine the creditworthiness of a borrower. Weighs the borrowers characteristics to the terms of the loan. Mixes both qualitative and quantitative aspects of the borrower. Look at credit reports, credit score, income statements, and other documents regarding the person's financial situation. They also consider information about the loan itself.

Default

Failure to pay interest or principal on a loan.

Collateral

Helps a borrower secure a loan. Tells the lender that if they default on a loan the lender has the right to take back what the loan was used for (Ex. a house or a car).

How can I use these in my life?

I can begin saving money to make sure that I will have enough money to pay back credit when I begin to use it. For example, I could save money to use on a down payment on a house to get a better mortgage deal.

Capital

Look at any money the borrower puts toward the investment. A lot of money put forward by the borrower decreases the chance of missing payments. (Ex. Those who have enough money for a down payment on a home most likely will have an easier time getting a mortgage.) Special mortgages (backed by FHA and VA) frequently require borrowers to put 2-3.5% for a down payment. Down payments show the borrower is serious which will make the lender more comfortable giving them credit.

Capacity

Measures their ability to repay a loan. Compares income against recurring debts. They assess the borrower's debt-to-income (DTI) ratio. Lenders look at how long the borrower has been working and their job stability