We all need to be financial savvy and become aware of the things lenders see in your credit report before sanctioning a home loan, car loan or a credit card or recruiting you for a job etc. You can always improve your chances of getting a loan. Generally, when anybody applies for a loan, credit risk is assessed by lenders based on a number of factors that include the income, credit or payment history, and overall financial situation. The factors, also known as the 5 Cs, give some additional information by explaining how these factors help you to understand better what lenders look for in a credit report. The 5 C’s of Credit is a common term in banking.
- Credit History: To qualify for different types of credit, it mainly depends on your credit history, that is your track record that you have established while making payments and managing credit over a period of time. Primarily, your credit report is an elaborate list of your credit history that consists of information given by the lenders who have given credit to you. Though information varies among different credit reporting agencies, the credit reports invariably include the same type of information, like the names of the lenders that have provided credit to you, different types of credit you have, your payment history, etc.Apart from the credit report, lenders also use a credit score that consists of a numeric value which is between 300 and 850 based on the information present in your credit report. The credit score aids in indicating the risk based on your credit history to the lender. Actually the higher the credit score, the lower is the risk.
- Collateral (while applying for secured loans): Lines of credit, credit cards, or loans you apply for are either secured or unsecured. With a secured product, like an auto or home equity loan, you need to pledge something you own as collateral. The collateral value is evaluated, and any existing debt that is secured by that collateral is subtracted from the value. The remaining equity plays a factor in the lending decision.
- Capacity: Lenders determine whether you can easily manage your payments. Your earlier income and your employment history are the important indicators of your ability to repay the outstanding debt. The amount of income you get, stability and the type of income are all considered. The ratio of your current income and any new debt, if any, is compared to your income before tax, known as the debt-to-income ratio (DTI), is calculated.
- Capital: If the primary source of repayment is your household income, the capital represents the investments, savings, and other assets that will help you to repay the loan.
- Conditions: Lenders are curious to know how you will spend the loan amount you applied for. They want to know your plan how you use the money and consider the loan’s purpose, whether the loan is used to purchase a property or vehicle or home loan. Other factors, like economic conditions and environmental factors which play an important role, are also considered.