Credit is a key factor in getting approved for a loan, but what exactly is it? In this blog post, we’ll explore the three C’s of credit and how they can impact your loan approval.
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The Three C’s of Credit
The three C’s of credit are creditworthiness, capacity, and collateral. These are the three things that lenders look at when they are considering giving you a loan. Your creditworthiness is your ability to repay the loan. Capacity is your ability to make the payments. Collateral is something of value that you can use to secure the loan.
Capacity is a measure of your ability to repay debt. In general, lenders look at two types of capacity:
-Your debt-to-income ratio, which is your monthly debt payments divided by your monthly income.
-Your loan-to-value ratio, which is the amount of your loan divided by the appraised value of your collateral.
If you have a high debt-to-income ratio or a low loan-to-value ratio, you may be viewed as a higher risk borrower and may have difficulty qualifying for a loan.
The first “C” stands for “collateral.” Collateral is an asset, such as a vehicle or a home, that can be used to secure a loan. If you default on your loan, the lender can seize the collateral to help repay the debt. Many lenders require collateral for loans above a certain dollar amount.
Credit history is the most important of the three C’s of credit. It’s a record of your borrowing and repayment habits. Lenders use this information to decide whether or not to lend you money and at what interest rate.
You can build a good credit history by making your payments on time, keeping your balances low, and using credit responsibly. A good credit history will help you get loans and credit cards with lower interest rates, which can save you money.
If you have a poor credit history, you may still be able to get loans and credit cards, but you will likely pay a higher interest rate. This means that it will cost you more money to borrow in the future.
There are two types of credit history: positive and negative. Positive credit history includes information like timely payments and low balances. Negative credit history includes information like late payments, high balances, and bankruptcies.
You can get a free copy of your credit report from each of the three major credit reporting agencies once per year at AnnualCreditReport.com. This website is the only one that is authorized by the government to provide free credit reports.