Saturday, May 16, 2009

The Four C's of Consumer Credit

Now more than ever, we need to be cautious about our credit score - also known as FICO (Fair Isaac Corporation) score and our credit history - a financial report of everything that exists or existed. You are more likely to get approved for a credit card, a mortgage, personal line or loan and in some cases a wireless company will check your creditworthiness to approve you for a contract plan with them. Having a good credit score and history can not only help you when you're in need financially but perhaps one of the important reasons of having a good credit score - usually 720 or higher - is that it can save you thousands of dollars on say a mortgage. This happens because you are less of a risk to banks or companies who lend you money, therefore, give you a lower interest rate than someone with a credit score of 640.

The chart above gives an estimated example of interest rate you will receive for a 30-year mortgage based on a 300,000 loan based on your credit score.

Understanding the basics of how credit is measured, you can do a better job improving and maintaining your credit score and credit history. There is a system called "The 4 C's Of Credit" businesses go by to determine if an individual or another company will pay on time if they lend out money. There has been talk about adding more C's to the system like "Capacity" to minimize risk even further but we will stick to the standard here.

1. Character
2. Capacity
3. Collateral
4. Capital

Character

  • Payments - Have they been on time?
  • Delinquent accounts - Are you late on payment(s) for a specified time? 3 months?
  • Available credit - How much have you used up on your loans? How much left?
  • Total Debt - How much do you owe on everything?
Capacity
  • Over all Payment History - Good or Bad?
  • Capability - How likely are you to miss a payment?
  • Your Income - How much do you make?
Collateral
  • Do you have assets to secure a loan incase your default? A Car Loan? Mortgage?
Capital
  • Do you own stocks, bonds or something of value you can sell that can be used to pay off the borrowed amount?

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