When you apply for a credit, the lender will evaluate you based on the 3 important criteria: character, capacity and capital; these 3 important criteria, or known as 3Cs will affect the decision of the lenders in either approve or reject your credit application. By understanding how the 3 Cs affect your credit application will help you to have a better prepare yourself when you want to apply for a credit.
1st C: Character
Character summarizes a lenders’ sense of how responsibly you handle your credit obligations. A good character need time to build and you are demonstrating a good character when you are payment your loans and credit card balance on time every time either in full or the minimum amount due. The lender will senses a good character as well if you are getting credit that matches your level of income and you will take the initiative to contact the lender when you are facing financial hardship. You are trying to work together with the lender to establish a new repayment schedule in order to get your debt repay. By showing a strong good character, you make the lender trust you that you will make a good-faith effort to pay your bill even if you run into financial hardship.
Besides the payment schedule, the lender will evaluate your character in many other ways, among them are how long you have been with your current job, how long you have lived in or owned or leased your home. The longer you stay with your current job and stay at your current address, the more comfortable the lender will feel with your character.
2nd C: Capacity
Capacity measures your financial ability to assume a certain debt. Lenders will always ask for your annual income of your job, the dividends that you will earn from any of your investment when you apply for a credit from them. Based on these figures, lenders will evaluate the amount dollars of credit they can approve to you. Banks will also evaluate the stability of these incomes. Generally the longer you have earned such incomes, the larger your credit capacity will be because banks will consider these incomes to be fairly secure.
Besides your incomes, lenders will look at your existing debt. Normally, your debt is measure against your incomes and the result will be the debt-to-income ratio. Most banks require your debt-to-income ratio to be less than 0.36 (36%) for fixed expenses and 0.28 (28%) for mortgage payment or rent. The higher your debt-to-income, the less credit the lenders extend.
3rd C: Capital
Capital consists of the financial assets at your disposal to pay of debt. Home, car, boat, land, stock, bond and mutual funds are example of capital. If your character and capacity do not prove sufficient to support for the credit you apply for, lenders could ask you to include your capital as the collateral for credit application. Lenders will seize your capital if you default your payment to retire your debt.
The 3 Cs are the important criteria to measure your qualify credit. It will be easy to be approved for credit extension or new line of credit if you have a good score in 3 Cs.