Your credit score is a measure of factors that may affect your ability to repay credit. It’s a complex formula that takes into account how you’ve repaid previous loans, any outstanding debt, and your current salary.
A credit score is dynamic and can change positively or negatively depending upon how much debt you accrue and how you manage your bills. The factors that determine your credit score are called The Three C’s of Credit – Character, Capital and Capacity.
Character:
From your credit history, a lender may decide whether you possess the honesty and reliability to repay a debt. Considerations may include:
- Have you used credit before?
- Do you pay your bills on time?
- How long have you lived at your present address?
- How long have you been at your present job?
Capital:
A lender will want to know if you have valuable assets such as real estate, personal property, investments, or savings with which to repay debt if income is unavailable.
Capacity:
This refers to your ability to repay the debt. The lender will look to see if you have been working regularly in an occupation that is likely to provide enough income to support your credit use.
The following questions may help the lender determine this:
- What is your current salary?
- How many other loan payments do you have?
- What are your current living expenses?
- What are your current debts?
- How many dependents do you have?
FAQs
The term “3 Cs of credit” was popularised in the 1960s, but the principles behind the concept date back much further. The three C's are Character, Capacity and Collateral, and today they remain a widely accepted framework for evaluating creditworthiness, used globally by banks, credit unions and lenders of all types.
What are the 3 C's for credit? ›
Students classify those characteristics based on the three C's of credit (capacity, character, and collateral), assess the riskiness of lending to that individual based on these characteristics, and then decide whether or not to approve or deny the loan request.
What are the three C's of credit according to the workbook? ›
For example, when it comes to actually applying for credit, the “three C's” of credit – capital, capacity, and character – are crucial. 1 Specifically: Capital is savings and assets that can be used as collateral for loans.
What are the 3 C's of credit Quizlet? ›
The factors that determine your credit score are called The Three C's of Credit - Character, Capital and Capacity.
Which of the three C's of credit has to do with reputation? ›
1. Character. Character, the first C, more specifically refers to credit history, which is a borrower's reputation or track record for repaying debts.
What do the 3 Cs stand for? ›
Character, capital (or collateral), and capacity make up the three C's of credit. Credit history, sufficient finances for repayment, and collateral are all factors in establishing credit. A person's character is based on their ability to pay their bills on time, which includes their past payments.
What is the meaning of Cs of credit? ›
The 5 C's of credit are character, capacity, capital, collateral and conditions. When you apply for a loan, mortgage or credit card, the lender will want to know you can pay back the money as agreed. Lenders will look at your creditworthiness, or how you've managed debt and whether you can take on more.
What are the 3 main credit types and briefly describe what they are? ›
The three main types of credit are revolving credit, installment, and open credit. Credit enables people to purchase goods or services using borrowed money. The lender expects to receive the payment back with extra money (called interest) after a certain amount of time.
What are the 3 factors that determine credit? ›
The primary factors that affect your credit score include payment history, the amount of debt you owe, how long you've been using credit, new or recent credit, and types of credit used.
What are the three important terms of credit answer? ›
Interest rate, collateral and documentation requirement, and the mode of repayment together comprise what is called the terms of credit.
When you apply for a business loan, consider the 5 Cs that lenders look for: Capacity, Capital, Collateral, Conditions and Character. The most important is capacity, which is your ability to repay the loan.
Which of the 3 C's is the major reason for authorizing a credit check? ›
The 'Character' component is the major reason for authorizing a credit check. Lenders want to assess your past behavior in handling credit and determine if you are likely to repay the loan.
What does character mean in 3cs? ›
Character: refers to the moral qualities unique to an individual or entity. We believe that while all three Cs are important, Character can sometimes be the most important. If the principal falls a little short in one of the other Cs, character can often move the needle from declined to approved.
What are the 5 Cs of credit in order? ›
The five C's, or characteristics, of credit — character, capacity, capital, conditions and collateral — are a framework used by many lenders to evaluate potential small-business borrowers.
What are the 7Cs of credit? ›
The 7Cs credit appraisal model: character, capacity, collateral, contribution, control, condition and common sense has elements that comprehensively cover the entire areas that affect risk assessment and credit evaluation.
What are the 6cs of credit? ›
The 6 'C's-character, capacity, capital, collateral, conditions and credit score- are widely regarded as the most effective strategy currently available for assisting lenders in determining which financing opportunity offers the most potential benefits.
What is one of the 4 Cs of credit granting? ›
They look at four main factors, commonly known as the four C's: credit, capacity, capital, and collateral.
