Wells Fargo is proud to sponsor again the Washington Informer’s Financial Literacy supplement. Understanding credit is an important part of financial literacy, which is imperative to preparing for many things in life that require financing.
Learning the Five C’s of credit is a great way to increase your financial literacy, especially when it comes to being approved for a loan. These five terms — credit history, capacity, collateral, capital and conditions — are what most lenders take into consideration when they are deciding about loan approval. Understanding the Five C’s of credit will help you determine if you are ready to take on new debt or if you need some assistance in learning how to better manage your finances and improve your credit profile.
Credit history is the record you have established while managing credit and making payments over time. It includes credit accounts opened or closed as well as payment history over the past 7 to 10 years. It also includes your credit score. Your credit score also can affect the amount you are approvedto borrow and the interest rate you may receive.
Capacity tells lenders how comfortably and consistently you will be able to make payments on a new account. Your debt-to-income ratio (DTI) is usually evaluated when lenders determine your capacity. DTI is the ratio of your current and any new debt compared to your before-tax income.
Collateral is a personal asset you own, such as a car or home. Lenders are interested in collateral because it offsets the risk they take when they offer you credit.
Capital represents assets you could use to repay the loan if you lost your job or experienced a financial setback. These assets could include savings or investments. Lenders evaluate your capital when you apply for large items like a home or car.
Conditions refer to information you share with the lender to further determine loan approval. Lenders may want to know how you plan to use the money, such as purchasing a vehicle or other property. Other factors, such as environmental and economic conditions, may also be considered.
If you would like to read more about the Five C’s of Credit, you can go here: https://www.wellsfargo.com/financial-education/credit-management/five-c
Your credit score matters because it can impact your interest rate, term, and credit limit. The higher your credit score, the more you may be able to borrow and the lower the interest rate you could receive.It includes credit accounts you’ve opened or closed, as well as your repayment history over the past 7-10 years. This information is provided by your lenders, as well as collection and government agencies, to then be scored and reported.