Creditors will measure your credit rating based on
the following three main things.
The three "C
's" show creditors your:
apacity or income to pay the debt |
ollateral or assets to secure the obligation
haracter shows your compliance to repay the debt
Capacity - Measuring your credit rating.
The very first question is whether you have sufficient income to
repay the debt. Creditors will definitely check to see if your income
exceeds your expenses so that you can comfortably pay the debt.
A creditor will then want to know:
1. Your income - from all sources
2. Your fixed expenses
3. Your other debts
The amount remaining from your total net income, after deducting
your fixed monthly expenses and other debts, is your capacity. If
your net income is $3,000 a month and your total living expenses
is $2,500, then your credit capacity is an amount that requires
no more than $500 in monthly payments.
If you now pay $400 a month for other credit obligations, then
your remaining capacity is a $100 a month, and a creditor should
extend you that amount of credit.
There are three techniques that will allow you to maximize your income:
1. Increase your income
2. Decrease your expenses (easier to do than the first one)
Reduce your other debts
2. Collateral - Measuring your credit
A lender or creditor can be secured or unsecured. Secured lenders hold
a lien against specific assets, such as real estate, an automobile, or
boat. If you fail to pay, the secured lender can sell the pledged asset
to recover debt owed. Secured lenders seldom loan more than the auction
value of the collateral.
Secured credit, is an almost guaranteed way to rebuild your credit
rating. Even with poor credit, a lender may advance your credit if you
ca secure the credit with a lien against some valuable asset. Many creditors
extend credit entirely on the strength of the pledged assets.
Other credit rating considerations are either ignored or carry comparatively
little weight in the credit decision.
What can you use as a collateral to secure your debts and rebuild your
credit rating? You may be appreciably wealthier than you think. Add
the value of your various assets (property that you own) and subtract
any existing mortgages or lies against those assets. The difference
is your equity or net worth in the asset.
This is what you have available to secure a loan. Do not overlook any
Investment real estate
Stocks, bonds, mutual funds,
Boats, planes, recreational vehicles
Notes and mortgages due you
Art, jewelry, antiques
Pensions, IRAs, and Keoghs
Income from trusts
You may have other assets to pledge. The point is that collateral gives
you a borrowing power approximately equal to your equity in your assets.
Regardless of your credit history, if you have collateral worth a solid
$100,000, you should be able to borrow close to that amount.
Character - Measuring your credit rating.
Creditors next consider your character. How important this is depends
upon the type of credit, and who your creditors are. Asset based
lenders rely chiefly on collateral, and they are less concerned
with your character than are unsecured creditors who can only rely
on your prior reliability for honoring your obligations.
When creditors check your character, they basically look at how
you satisfied your past obligations. Meaning they want to know:
1. How many credit defaults have you had?
2. What was the reason for the defaults?
3. How recent are they?
4. Do you own your own home? If you rent, for how long have you
rented the same apartment or house?
5. Do you have a checking account?
6. Do you have a savings account with regular deposits?
7. Do you have a payroll savings plan at work?
8. Do you have a telephone in your own name?
9. Do you have a criminal record?
10. Have you filed bankruptcy?
Positive answers to these nine questions will often offset an
otherwise negative credit rating report. Basically your credit
character boils down to your credit history in the past. In the
eyes of creditors, if your past credit character is good, there
is no reason to believe why your future won't look promising.