The Five Essential Attributes of Credit – What to Know

August 21, 2019

Whether you’re applying for a credit card, personal loan, mortgage loan, auto loan, or business loan, your lender will be taking your credit score into consideration. It’s an intimidating thought, isn’t it? Although it may not seem like much of a big deal if you’ve managed to maintain a good score, submitting a loan application when you have a bad score can make you feel downright sick. 

After you’ve submitted your application, your lender will obtain a copy of your credit report and use your credit history to evaluate your risk as a borrower. The goal is to ensure that you are capable of repaying the loan in the long run. 

See how important and crucial your credit score is to your financial undertakings? There’s more to a credit score than just mere numerical figures showing all your financial transactions. In fact, your credit score is all about your creditworthiness. In turn, creditworthiness is made up of five essential attributes that lenders look into. In this article, we’ll be exploring the five important Cs of credit that you should know and understand. Shall we begin?

Character

The first attribute of credit is the character. This bespeaks of your overall trustworthiness as a borrower. Your character is reflective of who you are as a financial borrower and as a payer. The credit score and history both play vital roles in your overall character. When assessing your character, what do lenders assess? For one, they will review your history of using credit (such as cards, loans, and more). After that, they will determine whether you have a proven history of consistent, on-time payments across all accounts. Finally, they will make sure that all your current credit accounts are in good standing, without any overdue or being collected. All these contribute to your character aspect as a borrower.

Capacity

The next on the list is capacity. What does capacity entail? Capacity simply means “cash flow.” This involves what goes into your pocket and what comes out. Lenders will have to assess the source of your income and the expenses you have. Are you self-employed? Do you have a regular job? What other types of loans do you have, such as mortgage loan, auto loan, and even personal loan? Your lenders will ask all these questions. The bottom line is, lenders will look at your income and check your stability. Capacity is the barometer lenders gauge to see how well you can manage your future loan payments. 

Collateral

Collateral is a crucial aspect in the world of credit. Why so? Lenders need to know that they will be protected once you borrow a significant amount of money. So what exactly is collateral?  By definition, collateral is an asset that a lender accepts as security for a loan. This means that if you borrow a significant amount of money and you aren’t able to pay overtime, a lender can seize your assets. This collateral or your asset can be sold and used as a back-up source of repayment— an obvious form of protection on the lender’s part. In most cases, collateral can be a home, lot, car, or another asset.

Capital

The next on the list is capital. There’s no doubt that capital is important when it comes to borrowing money. What is capital, you ask? Capital refers to the financial resources that you or your business can use to fund operations such as cash, machinery, equipment, and other resources. In most cases, lenders consider any capital the borrower puts toward a potential investment. A large contribution by the borrower decreases the chance of default. A good example is making a large downpayment when pursuing a loan— be it for your mortgage or auto loan. In the end, lenders want to see that you’re putting your money on the line just as you want them to.

Conditions

The last but not the least are other conditions. These conditions are other essential factors affecting financial transactions on a larger or smaller scale. What are these conditions that might affect credit transactions? There are quite a few, including the economy, your industry, the stability of your job, the market for the product you’re buying, and personal reason for borrowing. All these have to be taken into consideration before pursuing or granting credit.