Mastering the 5 C’s of credit is key to getting funding from banks and other financial institutions.
When applying for a new credit account, loan or mortgage, financial institutions try to mitigate their risk by performing a credit analysis on their potential customers. They base their analysis on 5 key performance indicators – The 5 C’s of Credit.
They are: character, capacity, capital, collateral and credit.
- Character relates to a potential borrowers personal credibility and reputation. Lenders subscribe to the expression, “past behaviour indicates future behaviour”. Each financial institution will have its own method for evaluating character but commonly reference work experience, credit history, credentials, references, reputation and interaction with lenders.
- Capacity refers to the lenders need to be sure that the borrower has the ability to repay the loan in full based on the proposed amount and terms. The lender will review past cash flow, debt and liquidity statements, credit score and borrowing and repayment history. A high debt to income ratio is perceived by lenders as high risk, and it may lead to a decline or altered terms of repayment that cost more over the duration of the loan or credit line.
- Capital, otherwise known as a down payment, is the amount of money that borrowers have invested in a property. Lenders want to check how invested you are in a property before making a decision. The down payment is deducted from the purchase price of your home. Your mortgage loan will cover the rest of the price of the home.
- Conditions – This C is out of your control and refers to the conditions of the loan, such as its interest rate and amount of principal. May also involve the cost of living and the number of homes that are listed for sale in the area.
- Credit is really the defining factor when lenders are weighing up whether or not the candidate is eligible for a loan, it highlights what the borrower’s repayment history has been like over a period of time. The credit score (also called credit history, credit report, credit rating) is the primary measurement factor. While credit reports are simply a track record of your payment history—no judgments—your credit score is more akin to a school GPA. It’s a cumulative number that measures your success relative to others, in this case grading you as a credit-worthy individual.
So, the primary objective when applying for a mortgage is to get a YES from the lender. Understanding the criteria lenders are looking at when determining whether or not you are a suitable candidate goes a long way when preparing for adjudication. Be prepared, get organized and apply now!
Hopefully this helped you understand how credit works. With Haystax you can have AI technology look over your finances and have you approved within 3-7 days! Mortgages are complicated.. getting one shouldn’t be