The 5 Cs of creditworthiness can unlock new opportunities

My wife Sylvia has a running joke in our household that I have no common sense and maybe many other husbands out there also get this. What I do know is that I have learned some sense that is not common with regards to credit knowledge and more specifically, what factors are considered in credit decisions. The 5 Cs are Conditions, Collateral, Capital, Capacity and Character.

1. Conditions
   Internal and external factors that could have a negative effect on repaying a loan. External factors could be a pandemic, surging interest rates and increase in home prices as we’ve recently seen. Internal could be how you are going to spend the money or what reason specifically do you need the loan.
   i.e.: Vegas trip vs. Fixing your car to get to work
2. Collateral
   Risk is always at hand when lenders want to consider parting with their money. The more security they have in the loan the easier the approval process comes. With someone who doesn’t have a credit history, the easiest way is to open a secured credit card using your own money. If you are going to get a personal loan — using a car for collateral is almost always going to get you an approval as opposed to not having any security.
3. Capital
   In accounting, you have assets and liabilities. Assets include savings accounts, life insurance, investments, 401(K), IRAs, equity in your home and cars that are paid off, which becomes your CAPITAL. Normally, the more capital you have or can show, the less risk you become to the lender. Because if something negative were to happen you have the CAPITAL to withstand the problem and keep paying on your debt.
4. Capacity
   Capacity is looked at by lenders as the Debt-to-Income (DTI) ratio that one must have to positively qualify for a loan. This is found by adding up all your monthly debt payments and dividing it by your pre-tax or Gross monthly income. So, if you have a $1,500 mortgage payment + $500 in credit card payments that’s $2,000 and if you make $5,000 a month, your debt to income is $2,000/$5,000 = 40%. It’s recommended to keep your DTI ratio for all debts at 36% or lower.
5. Character
   This is how you’ve managed to pay your debts in the past. Seen through the three credit bureaus of Experian, Equifax and TransUnion they will report your FICO® and Vantage Score® and look at late payments, foreclosures, inquiries, collections and bank-ruptcies to factor on the decision to grant you credit. Generally, the better you handle your credit habits monthly, the higher your score.

Jimmy or Sylvia Rios live in Maricopa and can be reached at 480-935-6049, 480-341-2901, [email protected] or [email protected]. Their website is NextLevelCredit.net.

This sponsored content was first published in the June edition of InMaricopa magazine.