While a lot of emphasis is placed upon your credit score, it’s actually just one of the things lenders consider when determining your creditworthiness.
Known as the five Cs of credit, these are your character, capacity, capital, conditions and collateral.
Let’s take a look at each of these in-depth.
Also referred to as your credit history, this is a measure of how you’ve performed in the past when loaned money. Did you make timely payments? Did you only pay the minimum amount due, or did you exceed the minimum payments?
Your past behaviors as recorded by each of the big three credit reporting agencies (Experian, Equifax and TransUnion) are reviewed to determine how much of a risk you represent.
This determination is largely based upon what you’ve done in the past. It’s also where your credit score comes into play, as it is calculated based upon factors indicative of your ability to manage your finances.
Determined by evaluating your cash flow (how your income is balanced against your expenses), lenders use Capacity as an indicator of your ability to repay a loan.
Your employment history is also a factor in this regard as it can offer clues as to how stable your income might be. A longer time on the job is looked upon with more favor than a shorter one. The type of income you have is also taken into consideration, as some forms are more likely to dry up than others.
The main thing lenders are trying to determine when they evaluate Capacity is whether or not you have the wherewithal to easily repay the debt you’re about to incur.
A key factor in this regard is the amount of debt you’re carrying. If it’s more than you can manage, working with a settlement company before applying can help you get your expenses more in line.
Debt comes in two basic flavors: secured and unsecured.
Secured debt is backed by some tangible good, be it a car, a boat, an RV or real estate. The lender is granted access to an item of value they can claim if you default on the loan.
The vehicles against which they are written typically back vehicle loans. Similarly, real estate financing is usually backed by the property being purchased with the loan. Essentially, the lender buys the item and allows you to use it while you repay the money they spent on your behalf.
Meanwhile, unsecured loans (credit cards for example) are backed solely by your promise to pay, which is why they come with higher rates of interest.
Read also: What is Short-Term Financing (+ 6 Options to Consider)
How much skin are you willing to expose to the game? This can be in the form of a down payment on a car or a house, or it can be investment dollars when you’re looking for a loan to start a business.
Either way, the more you front on your own, the happier you’ll find lenders to work with you.
This makes the deal more of a partnership than a one-way street in which they take all the financial risk, but you get to share in the rewards.
Read also: The 5 Best Credit Card Rewards Programs
What are the circumstances under which you are planning to use the money?
If you’re seeking a business loan, the underwriter will want to know the nature of the competitive environment into which you’re asking them to invest.
The state of the economy, emerging trends and governmental actions relative to your business are among the factors looked upon as conditions by lenders. These elements — which are often out of your control — could debilitate your ability to repay the loan.
Having a solid handle on the five Cs of credit — and seeing to it they are properly addressed — will help ensure you qualify for loans easily.