Characteristics of Credit

Characteristics of Credit are a framework to evaluate trustworthy borrowers. These characteristics incorporate both qualitative and quantitative measures. The lenders or any financial institution watch your credit score, income statements and other documents which reflect your financial situation. Comprehending the five characteristics is critical to your ability to access credit. These characteristics are: Character, Capacity, Capital, Collateral and Conditions.

CHARACTER: It is the first characteristic of Credit and sometimes often known as Credit History. It is beneficial for lenders or bankers in order to know the borrower’s reputation. Character is basically the opinion of lenders of a borrower’s personality and creditworthiness. The information like how much an individual has borrowed in the past and has he paid all his bills on time appear on an individual’s Credit Report along with the information on bankruptcies. These information may last for over 7 to 10 years in the credit report. It is assessed from credentials, references, reputation and interaction with lenders.

Character is something which an individual can promote or control. Therefore, it is totally in his hands to prove himself as a responsible borrower. This information assist the lenders or bankers to save themselves from risky customers.

CAPACITY: Capacity measures an individual’s ability to repay the loan. Loan is a kind of debt which you must repay in any situation. Lenders or any other financial institutions are very helpful in providing you the funds when you are in your dire needs. However, they check your capacity by comparing an individual’s income against recurring debts and assessing his Debt- to- Income (DTI).

Debt-to-income ratio divides the total of all monthly debt payments by gross monthly income, giving you a percentage. A high DTI indicates your high usage of money in paying off other loans. Hence, lower an individual’s DTI, better the chances of availing loan.

CAPITAL: Capital is the amount of money invested by business owner. It indicated the borrower’s level of seriousness. Lenders or bankers sometimes approve any collateral attached by an individual. His large contribution may provide satisfaction to the lenders or bankers as the chances of default payments become very less.

Down payment size can also affect the rates and terms of a borrower’s loan. It is assessed from the amount of money the borrower or management team has invested in the business. Therefore, if a borrower is availing loan from any financial institution he can attach any kind of security to evaluate his trustworthiness.

CONDITIONS: Conditions may refer to the interest rates and the amount of principle. It basically focuses on how the borrower is going to use the borrowed money. Condition associates with his plan of utilisation of the provided funds. However, most of the banks don’t ask your plan until you are paying off the loan amount on time.

It matters to ensure that loans are repaid, banks want to lend to businesses operating under favorable conditions. They want to identify risks and protect themselves accordingly. Sometimes, lenders or bankers consider conditions that are not in the control of borrowers such as the state of the economy, industry trends or pending legislative changes. It is assessed from a review of the competitive landscape, supplier and customer relationships, and macroeconomic and industry-specific issues to ensure that risks are identified and mitigated.

COLLATERAL: Collateral is any kind of asset and security pledged by the borrower to get the funds swiftly. Collateral generally comes under secured loans. It acts like a backup source if the borrower is not able to repay in the future. Therefore, lenders or bankers saves themselves from a big loss. In other words, it gives the lender the assurance that if the borrower defaults on the loan, the lender can repossess the collateral.

However, the loans that are secured by some form of collateral or security are commonly come up with lower interest rates and better terms as compared to other unsecured forms of financing.

Therefore, these are the five characteristics of credit which will help you to improve your credit score while you feel the need of taking any kind of loan. It would be better to read them all before applying for the credit card or any kind of loan.