What is 4 Cs of credit?
Are you planning to apply for credit very soon? Definitely you will like to put things in order before you apply so that your application will not be rejected. Whether you are applying for personal loans or credit card, no financial institution will just grant you the loan or credit without assessing your credit worthiness. No matter your relationship with a bank, it is not automatic that your application for loan will be granted. Before your application is granted, the bank or credit card company will like to look at certain criteria. The criteria are known as 4 Cs of credit. If it is in business, they call it 5Cs of credit. But in this article, our focus will be on 4 Cs of Credit.
Elements of 4 Cs of Credit
The four elements that make up the 4 Cs of Credit are discussed below:
- Character: Character has to do with your credit history. Before you can be granted any credit, the lender will like to review your credit history. Have you been paying your previous debts as at when due? Are you always late in payment? Have you missed payments before? Are you in default of any loan? Answers to these questions point to your character. The lender can use your credit score to assess your credit worthiness as this is more encompassing. For a person with no credit history, it may be difficult to assess your credit. That does not mean that you will be granted the credit. You need credit history in order to qualify for credit. Nevertheless, this can be waived if you can provide collateral as security for the loan. On the other hand, if you have someone with good credit history to co-sign the loan for you, your application may be granted.
- Collateral: The second element of the 4 Cs of credit is collateral. Collateral means any asset which you are depositing as a security against a credit or loan in case of any default. The value of the collateral is expected to be more than the loan which you are applying for. In case you are unable to pay back the loan, the lender will sell the collateral to recover his money.
- Capacity: Definitely you will like to request for a specific amount when applying for a loan. The lender will use his discretion whether to grant you the whole amount or to reduce it to what you have the ability to repay. Certain ratios like debt-income ratio. If you are having existing debt which you are still servicing, it may make it difficult for you to meet up with the repayment of the new loan. Also, if your income level can’t sustain the loan you are asking for, you may not be able to meet up with the obligation of paying back the interest and the principal every month.
- Condition: Why do you need the credit? What do you want to do with the loan if granted? For instance, if you are applying for a mortgage loan, the lender may consider this type of loan less risky as the house will equally serve as collateral. Lenders may also want to look at the environmental factors that may affect the repayment of the loan.
Read Also: How to get your personal loan approved quick
If you are able to meet these 4 Cs of credit, there is possibility that your application for the loan or credit may be granted.