Financial Literacy - Day 3 - the 5 C's

 

Applying for credit can be very frustrating.  If you read enough in the media you would think Credit grows on trees.  There are certainly some circumstances where credit may seem easy to get but at the end of the day most credit applications are assessed on the 5 C's of credit.  Credit applications are designed to capture your information in a format that addresses the 5C's.  Where the disconnect usually occurs in the lack of due diligence a company does to verify the information.  So just exactly what are the 5 C's?

1) CREDIT:  Lenders will take a look at your borrowing history and see how you pay your bills.  This is your credit report and confirms if your payments are made on time.


2) CHARACTER:  An application tells a lender a lot about you personally.  They are looking how long you've been on your present job and how long you have been in your line of work.  Is your income reasonable for the type of job you do.  For example if you declare you work in a grocery store and you make $75,000 a year that might raise a red flag.  But if you say your the manager of a high end grocery store and you make $75,000 a year that is more reasonable.  Make sure your employer and occupation correctly reflect what you do.  Someone who moves every six months may not necessarily be a good credit risk to a lender.  A lot of recent credit inquires might alert a lender to think you are busy seeking credit and will affect your quality of application.  Lenders are looking for a stable client who has a decent job history and some stability of location. 

3) CAPACITY:  How will you service the debt?  Does your income and existing payments leave enough to provide you the "capacity" to service the new debt.

4)  CAPITOL:  This is your overall net worth.  How much do you have in savings and rrsp's?   In the case of buying a home your capitol would be your down payment and lenders want to see where it's coming from.  If you are borrowing money for your business it's also expected that you will use your own money or "capitol" and lenders want to know where it came from. 

5) COLLATERAL:   What are you using to secure the loan?  In the event of car loan the collateral will be the vehicle, if the funds are for a mortgage the house will be the collateral.  Proper collateral often reduces the risk of the loan. 

The next time you fill out an application for credit pay attention to the questions.  You will be able to identify which one of the 5 C's the question applies to.  Try to give the lender a proper picture of you situation but don't misrepresent yourself.  That's called fraud and comes with it's own consequences.