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The Three C’s of Credit That Lenders Use
Creditworthiness plays a crucial role in determining whether a borrower will be approved and what interest rate they will receive. Lenders evaluate creditworthiness using the Three C's of Credit: Character, Capacity, and Capital. Understanding the three C’s is essential for borrowers looking to build good credit.
Character
Character refers to a borrower’s reputation for repaying debts and managing financial obligations responsibly. Lenders assess your character by examining your credit history and looking for indicators of reliability. Things that influence your character include:
Tips to strengthen your character are to make timely payments, keep credit utilization low, and maintain a long-standing credit history. Borrowers should review their credit reports for accuracy and address any discrepancies promptly.
Capacity
Capacity refers to a borrower’s ability to repay debt based on income and existing financial commitments. Lenders assess borrower’s capacity by evaluating the following:
Tips to strengthen capacity are to maintain a stable income source, minimize high-interest debt, and avoid taking on excessive financial obligations. Prioritize building an emergency fund to provide a safety net in case of unexpected financial challenges.
Capital
Capital refers to the assets and savings a borrower possesses that can serve as a cushion in case of financial difficulties. Lenders evaluate capital to determine a borrower’s financial security level and ability to handle unforeseen circumstances. Factors that impact your capital include:
Tips to strengthen capital are to focus on saving and investing, diversify assets, and make informed financial decisions. Building a solid capital base enhances borrowers’ creditworthiness.
Mastering the three C's of credit is essential for anyone who wants to establish a solid credit history and gain access to favorable borrowing terms. Borrowers should pay special attention to character, capacity, and capital to make significant strides in improving their creditworthiness.
If you'd like to learn more about our loan servicing software, or how we can help you, email us at solutions@shawsystems.com.