This week’s blog was written by Jamie, a Senior Lending Specialist at NorthWinds FCU!
Did you know that credit score isn’t the only thing that underwriters look at when reviewing a loan application? Having a high credit score can help get you a better rate, but much more goes into getting your loan approved! The “4 Cs of Credit” are the main criteria that a lender will use to determine your creditworthiness. Knowing these 4 Cs and understanding how creditors use them in making their decisions can help you better position yourself for an approval. They are:
Capacity: Arguably the most important C of credit is Capacity. Capacity is what determines if you can afford the loan and your ability to repay it. The main indicator of capacity that lenders will look at is your debt to income, which is your monthly debts divided by your gross monthly income (DTI). Many lenders prefer a DTI of 45% or less. They may also consider your unsecured debt to income (UDTI) which is the total of your unsecured balances divided by annual gross income. This includes your credit card and personal loan debt and should be no higher than about 20%.
Character: Character includes your credit payment history and also how you manage your deposit accounts and credit cards. The single biggest factor that goes into determining your credit score is whether your payments are made late or on time. Do you frequently overdraft your checking account or max out your credit cards? Lenders may take these things into consideration. Character can also include bankruptcy, judgments, collection accounts, and whether or not you have used credit before.
Collateral: This is an asset that you pledge to secure your loan. Collateral can be lots of different things, including property, vehicles, or personal assets. Lenders will evaluate the amount of your loan request compared to the value of your collateral, which is your loan-to value, or LTV. A low LTV is less risky for the lender, and therefore has a better chance of getting approved. A lender will also consider the condition of the collateral such as high miles on a vehicle or a salvage title.
Capital: Do you have funds on deposit in your savings and checking accounts? Are you able to make a down payment on the vehicle or home that you are purchasing? Lenders like to see that you have some “skin in the game” when making a decision on your loan request.
The 4 Cs of credit can be a helpful tool to guide you and prepare you for success when applying for your loan. You can also reach out to a lender at NorthWinds with any questions to help you on your credit journey!
Jamie Swanson
952-445-0888 ext. 745