EP056 Back to Basics – The 5Cs of Credit
Almost everyone will need to make use of credit at some point in their lives, whether it’s by applying for a loan, credit card or a line of credit. There are many things that lenders take into account when you apply for credit, and the assessment of these will result in either a positive or negative lending decision.
Today, I am sharing insights into how a bank decides whether or not to give you a credit card, loan, or line of credit. I explain the 5Cs of credit and the evaluation process that takes place when you apply for credit from financial institutions or retail stores. I also share some best practices to help you stay on top of your finances and obligations.
“Character is often the big decider as to whether or not money is lent.” – Tracey Bissett
This Week on Young Money:
- Understanding your debt service capacity and the Total Debt Service Ratio (TDSR).
- How lenders score your financial reputation aka your credit score.
- What role your character plays in the decision making process.
- How lenders calculate your capital net worth.
- What is collateral and its effect on the lending decision?
The 5Cs of Credit:
- Capacity – can you pay back the money?
- Credit history – do you have a history of using credit responsibly?
- Character – what will you do when no one is looking?
- Capital – what is your capital net worth?
- Collateral – what security do you have to provide?
Best Practices:
- Check your credit score annually and address any errors with Transunion or Equifax.
- Manage your finances and obligations in a way that you are proud of.
- Calculate your capital net worth annually – all your assets minus all your liabilities. If your capital net worth is getting bigger or less negative from the last time you calculated it, you are on the right track.
Resources Mentioned:
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