You may be familiar with the 3 C's of Credit – character, capacity and collateral. These three factors are considered by creditors before extending a loan to someone applying for credit. However, there is a fourth factor that must always be considered by credit consumers. I will discuss the fourth C shortly. But first, let's review the 3 C's of Credit.
The first of the 3 C's is character. If you have good character, you will assess the risk of the loan before applying and determine whether or not you can repay the debt. If something happens in your life that makes repayment difficult, an honest person will contact the creditor immediately, explain the situation, and make arrangements to repay the debt as soon as possible.
The second C is the capacity to pay debts. Creditors will assess your household income, employment history, and other factors to determine whether or not you are capable of honoring the terms of the loan. If you are gainfully employed, your situation is stable and you are more likely to make loan payments on time. If you have a steady work history, creditors will consider you to be a good credit risk.
The third C is Collateral, which is any personal property you used as security for a loan. If you are unable to repay the loan, the creditor can secure a lien on your property and sell it to cover the amount of the debt. Thankfully, it is not necessary for you to include collateral as part of your loan application. Also, creditors tend to put more weight on your character and capacity to pay.
Another factor that creditors consider is what I'm calling the fourth C of credit. In fact, this factor is the one most discussed often by creditors and by those seeking credit. The fourth C is your credit rating.
You should make every effort to keep your credit rating as high as possible. The overwhelming majority of creditors will review your credit report after you apply for a loan. Many credit decisions are made without considering your character or your good intentions. If you have a low credit score, you are automatically considered to be a bad credit risk.
At some point in your life, you will need credit. Exercise good character, make sure you have the capacity to repay loans, and avoid using collateral. Finally, keep your credit rating high. Your financial life will be much easier if you pay attention to the 4 C's of credit.