The Four C's of Credit

The four C's of credit—capital, capacity, credit history, and collateral—help lenders determine whether you are likely to pay back your home loans on time before actually committing to a loan. Here is a breakdown of this rating system and how lenders put it to use.

What do lenders look for in my credit score?

When lenders pull your credit, they look at it from the perspective of the four C's. Each "C" tells a different story about the way you handle money. They are indicators of your past and current financial health, and can help predict what your future financial health might look like based on your habits and history.

Capital

“Capital” refers to the amount of money you have available to make a down payment; or the value of your assets and net worth. Lenders ask how much capital you have to determine if you are able to purchase a home—including its down payment—and still have enough money left over for other expenses. Quick tip: lenders prefer to offer loans to individuals that save money themselves as opposed to being offered a gift. This is a sign of a borrower's ability to manage budgets and save up for large expenses.

Capacity

“Capacity” is your ability to make regular payments on loans and bills based on your employment, income, and monthly expenses. Banks and lenders calculate your “debt-to-income” to determine how much of your monthly income can be used to make a monthly mortgage payment. In other words, lenders qualify you for a loan after they determine that you have enough of an income paired with fairly low debts. Your capacity to purchase a home is another way to signify your ability to stick to mortgage payments without getting behind.

Credit History

“Credit history” lets lenders know how much money you owe, how often you use credit, and if you pay your bills and loans in a timely manner. Your credit history is shown on your credit report, which contains information about how much money you have borrowed, who you borrowed it from, how soon you repaid your debts, and how you are handling current debts. If your credit report shows that you have missed, late, or unpaid payments, your mortgage lender might hesitate to qualify you for a loan. We wrote a blog about how you can clean up your credit score. Give it a read!

Collateral

“Collateral” refers to property or assets offered to secure home loans. It assists the lender in making a loan to you by granting them the right to seize your home if you cannot repay the mortgage. Homes cost a lot, so offering your property as collateral helps you promise your lender that you will make y

our mortgage payments in a timely manner. The lender examines the value and condition of your property to help ensure it is in fine condition (a good lender would never sell a loan for a house in serious disrepair), and to check that the home is worth a bit more than the amount of the loan in case the property is sold. That way, there would still be enough money left over to pay off the loan.

After reading about the four C's of credit, where do you think your credit stands? Our Financial Opportunity Center® can be a resource for you as you navigate your credit repair journey. Read more about how our financial coaches can assist you today.