What do bankers look at when they approve a credit request? Every question you are asked, every piece of information you are required to provide, every point on your credit score, and every payment recorded on your credit report is done for one thing and one thing only. That is to measure the strength of the 5C’s of Credit.
The 5C’s of Credit are what the banker looks at and measures to see how strong your credit application is. If they are strong, you will be approved and at a favourable interest rate. If the 5C’s of Credit are weak, you will be either declined outright, or if approved you will be given interest rates that are not favorable.
The first “C” is Character and it can be defined as “Will you make the payments, even in difficult times?” The second “C” is Capacity and it can be defined as “Do you have the ability (income) to make the payments?” The third “C” is Credit History and it can be defined as “How have you handled your credit responsibilities in the past?” The fourth “C” is Capital and it can be defined as “Do you have some savings set aside or do you spend everything that you make?” The fifth and last “C” is Collateral and it can be defined as “If you don’t make the payments, this will be seized by the creditor and applied towards the outstanding payments”
Each of the 5C’s can be strengthened. The stronger they are, the better the interest rates you will be offered. You have more control over the credit application process than you realize and you can start by strengthening each measurement that the banker looks at. Some may take time, while others may be done quickly. To strengthen others, it may take some work, or it may be easy to complete. Every person has a specific credit circumstance that they find themselves in, so what they need to do depends on where they are starting from.
The good news is now that you know what the banker is looking at and that you can improve what they are looking at, you can begin today to use the control you have over the credit approval process by strengthening the 5C’s of Credit.
One way to strengthen the Character “C” is to reside at one place for a length of time. Do not move every six months. Bankers like stability and when you change addresses on a regular basis, this does not demonstrate stability. You do not need to live at one address for 25 years to gain an improvement, but anything less than a year will not be to your advantage.
One way to strengthen the Capacity “C” is to increase your income. Bankers want to see that you can afford the payment that your current credit request will create. The lower the percentage of your income that goes towards the newly created payment, the better. The new credit responsibility cannot present a financial hardship and you must be able to easily afford making the required payments over the repayment schedule.
One way to strengthen the Credit History “C” is to make your current credit payments on time, every time. That means paying, at the least, the minimum payments on all credit cards and all loan payments. Payment History is the most important factor that is looked at when determining your credit score and keeping your payments current is the easiest way to maximize the strength of this measurement.
One way to strengthen the Capital “C” is to have a savings account, contributing to it regularly and having it grow. When a banker can see that you are increasing your assets and not spending everything that you are making, they are taking note that you are being financially responsible. That reflects well in the credit application. It does not need to be a large amount of money. What counts is a consistent pattern of contributions to your savings.
One way to strengthen the Collateral “C” is to have the other four “C’s” so strong that you don’t need to have collateral (security) taken on your credit request. While collateral does not get a credit request approved (it only makes it stronger), you can make the overall application so strong that it is not even needed. Note that some banks have a policy that security is to be taken, depending on the reason for the loan, no matter how strong the rest of 5C’s of Credit are. An example would be taking the vehicle as collateral when asking for a car loan.
You do have control over whether your credit application is approved or not. When you know the banker is looking at the 5C’s of Credit and you strengthen them before you make a request for credit, you are enabling the banker to say “You are approved!” Banks make money by lending out money, and the banker wants to approve your credit request. When you strengthen each of: 1) Character, 2) Capacity, 3) Credit History, 4) Capital, and 5) Collateral, you are making it easier for the banker to approve the application. Use the control that you have and strengthen the 5C’s of Credit.