A common misconception with lending and borrowing is that people think it is only your credit score that matters when it comes to borrowing money. While it is certainly true that your FICO score plays a big role in the loan process, credits these days look beyond it. Many banks and creditors use 3 general guidelines when it comes to making the decision to grant credit or a loan, the three C’s of borrowing if you will. The three C’s of borrowing are Character, Capacity, and Collateral. These three factors help the credit institution figure out which consumers are the most profitable in a risk versus reward scenario that plays out every day in every financial institution across the United States and Canada.
Character. Your bill paying habits, your credit history, how many credit cards you have, how often if at all you have been late paying bills, all of these help in a credit sense determine your character. How serious are you about paying off your debts, which are contractual obligations? are you chronically late paying your bills? This information comes from the three credit reporting agencies Experian, TransUnion and Equifax. These days more and more creditors are using and pulling all three reports on you to gauge your trustworthiness, your ability to repay debts. They also factor in how much debt you have, if you have too many open lines of credit all carrying active balances this can make you less credit worthy.
Capacity. This is your debt to income ration. How much money is coming in and how much every month on average is going out the door to pay off bills. The length of your employment is used in house by the creditor as part of their internal ranking process. How much your monthly or yearly income as well is a factor. If you rent or own your own home also is a factor. None of these are part of credit reports, yet is vital when it comes to ranking you on a credit scale.
Collateral. This is any assets you can use to secure a loan, the material security that can be used to secure a loan. This collateral can be a house, boat, stocks, bonds or other such assets. The more assets you have, the more favorable you are to lenders, as it shows that you are not only responsable, but you have assets that can be sold off if needed to settle your debt.
The higher your credit report score, or FICO score and the more assets you have, the better chance you have at a loan with a favorable interest rate. If your debt to income ratio is low you are also more likely to find favorable lending terms. If you have plenty of assets this is another perk in your favor. It is best not try and hide assets when applying for a loan or credit, trying to hide them can actually cause you to not get the loan or receive higher interest rates. Banks are looking for consumers to behave in a way that will generate profit. It all comes down to the bottom line of which consumers will generate profit for the bank or lending institution. If you are more likely to default or be a liability for the banks bottom line you will likely get passed over for credit or a loan.