How Lenders Rate Creditworthiness: The Three Cs
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How Lenders Rate Creditworthiness: The Three Cs
Lenders must evaluate the risks of lending money to others. In commercial lending, creditors generally follow the same principles to evaluate a borrower’s creditworthiness.
Things To Know
- Capacity, capital, and character are the key factors of your creditworthiness.
The three Cs: keys to your creditworthiness
A creditor usually looks at three factors known as the "three Cs": capacity, capital, and character.
- Capacity. The present and future ability to meet your financial obligations. Some of the areas examined would be your work history and the amount of debt that you already owe.
- Capital. Savings and other assets that could be used as collateral for loans. Even if you are not required to post collateral, many creditors express a preference that you have assets other than income that could be used to repay a loan.
- Character. This boils down to trustworthiness, promptness in paying your existing bills and other debts, and your credit history.
In days of old, the "three Cs" may have been all that were needed to get the nod on a loan, but in today’s information age, much more is required, such as a credit report and credit score.