The 5 Cs of credit

When you apply for a loan or mortgage there are several factors the lender will consider to determine if you qualify. We call these the five Cs of credit:

  • Credit
  • Capacity
  • Collateral
  • Capital
  • Character

The five Cs are considered along with the amount you want to borrow, the term of the loan and the interest rate.

Credit is measured by your credit score, which is calculated from your credit history. This includes criteria such as your payment history, the amount you owe, and the length of time you have had credit.

Capacity is your ability to repay the money you borrow, which is determined by looking at your debt ratio. In its simplest terms, your debt ratio is calculated by dividing your monthly debt by your monthly income (before taxes). If your percentage of debt compared to your income is too high, it may be difficult for you to manage the payments of a mortgage or another loan.

Collateral is property or large assets you own that can be used to help to secure the loan. For an asset to be considered collateral it must have an account or serial number of some type and the lender must be able to assign value to it and register a lien against it.

Capital refers to your net worth and is the value of your assets minus your liabilities.

Character is the impression you make on the loan officer about your stability and willingness to repay the loan. This is partially determined by your history with the credit union and your interactions as a member. Character cannot be measured with a formula because it is a reflection of your personal qualities, reputation and habits.

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