3 C's of credit-Capacity, collateral, and character

By
Real Estate Agent with Rix Realty - Advantage Team Realtors

When you want to borrow money, lenders will look at a number of things before agreeing to grant credit to you. First, lenders want to know if you have the financial ability to repay the loan. This is known as capacity. Second, lenders look for any property you have to back the loan-again, this is called collateral. And third, lenders want to know if you will make your payments and how you have handled other loans in the past. This is called character. Capacity, collateral, and character represent the three C's of credit.

The most common types of credit include revolving credit, installment credit, and service credit.

Revolving credit allows you to borrow up to a specific dollar amount. The monthly payment may vary as your balance changes. As you repay the credit, you will be able to borrow it again. Credit cards are revolving lines of credit.

Installment credit allows you to borrow a specific amount, for a specific period of time. The monthly payment usually remains the same. When you have repaid the amount, the loan is closed. Car and mortgage loans are considered installment credit.

Service credit allows you to pay for a service at a later date. If you cannot make the payment in the agreed upon time, there is a penalty. Utility companies offer this kind of credit.

   Most types of loans can be categorized as secured or unsecured. Secured loans are backed by property that has value, also called collateral. An example of a secured loan is a car loan, as the car is security or collateral for the loan. In other words, if you don't make the loan payments, the lender can take back or repossess the car.On the other hand, an unsecured loan does not have any property backing the loan. If you, for example, apply for a signature loan at a bank or credit union, this would be considered an unsecured loan. Many credit cards are unsecured; however, not all are. Some credit cards are known as secured credit cards. A secured credit card may be secured by your savings account or by the merchandise you purchase. If you don't make the payment, the lender can and will take the item you pledged as security. Before you sign any credit card agreement, make sure you read and understand all the fine print.

  To understand the role a lender plays in the credit-granting process, you might think about what you would want to know if someone wanted to borrow money from you. You certainly would want to know that they have a job and that they have the ability to pay you back. You would want to know how long they have been at their job and that they would make every effort to pay you back. Knowing whether the potential borrower had repaid their other loans on time and in full would also be important to you. Lenders are no different.Lenders are in business to lend you money-that's their job. They have federal and state government regulations, as well as company guidelines they have to follow.

  Some people think that lenders look for any reason not to give a loan, but this simply is not true. Lenders want to make loans, though they want to make them to people who will repay the loan. When you want to borrow money from a lender, you need to fill out the application completely and honestly. If you aren't sure how to answer a question on the application, call the lender and ask for help.When you meet with a loan officer, be helpful and polite. Answer their questions to the best of your ability. Again, put yourself in the position of the lender-if you were going to lend money to someone, you would expect to be treated politely, honestly, and with respect.If you are turned down for the loan, ask why. It doesn't do you any good to get upset with the loan officer. You may be turned down for any number of reasons. Ask the loan officer what actions you could take to qualify for the loan in the future. Just because one lender turns you down for a loan, however, doesn't mean another lender will do the same. If you are turned down at one financial institution, make an appointment to see a loan officer at another bank or credit union.

   The way you handle loans made to you will determine whether you have "good credit." What exactly does it mean to have good credit? You can achieve good credit by making all of your payments, as agreed, in full monthly payments. If you want good credit, you cannot skip payments or pay less than the full amount due. If you have made financial mistakes in the past, it's still possible to build good credit by committing to paying all of your bills on time and in full. Cheers and happy buying!

 

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