Wondering if you will qualify for that new auto loan or rewards credit card everyone is raving about?
Lenders look at very specific criteria — the six C’s of credit — when deciding whether or not you’re a good credit risk. Understanding those criteria can help keep you from making credit missteps, plus help you qualify for some of the best terms available.
1. Character
You are considered to have good credit character when you live up to your financial and credit agreements. Paying bills on time and meeting financial obligations are signs of good character.
Your credit score and your credit history are good ways for a lender to learn about your character or credit reputation and how well you pay your credit obligations.
That’s why it’s a good idea to check your credit reports and your credit score before you apply for credit. You can get your credit reports for free once each year at AnnualCreditReport.com.
To track your credit more closely, you can sign up for Credit.com’s credit report summary. You’ll receive your a free credit score, plus expert tips and customized advice to help you build and improve your credit.
2. Capacity
Capacity reflects your ability to repay a loan or other financial agreement. Potential creditors want to see that you’ll have enough cash left over after paying your fixed monthly expenses to repay a new credit or loan account.
Capacity is really just another term for your debt-to-income ratio, which measures your income versus your outgo. The lower your monthly debt obligations and the higher your income, the better your capacity.
3. Capital
A potential lender also will assess your capital. Wondering if you have any? Subtract all your debts from your assets, including any property that you may own, and this is your capital. Lenders and creditors like to see that you have enough capital to handle another loan or credit account before approving you for new credit.
4. Conditions
Lenders look at conditions such as the stability of your employment, your other debts and financial obligations, and how often you’ve moved in the past year when considering whether to approve you for a loan. The longer you’ve been in a job and the less frequently you’ve moved the more stable your life conditions appear to potential creditors and lenders.
5. Collateral
Do you have collateral? Collateral is any property or possession that can be used as security for a payment of a debt. For example, a home or automobile serve as collateral against the loans you might take out to purchase them. Lenders like collateral because it guarantees them against a total loss if you fail to repay your loan. If that happens, your collateral may be sold or repossessed to repay your financial obligation.
6. Cash Flow
Do you have adequate cash flow to repay a new loan? How much income do you have coming in each month? Are you paid regularly, or does your income fluctuate based on seasonality or other factors? A lender or creditor wants to make sure you have enough cash flowing your way on a regular basis so that you can pay for a new credit obligation.
This article has been updated. It was originally published August 13, 2014.