Five Cs Of Credit

  

The 5 Cs of credit are location, location, location.

Wait, no, that’s not right. Those are the three rules of real estate. Let’s try that again.

The 5 Cs of credit are character, capacity, capital, collateral, and conditions, and they are what guide lenders on whether or not they should loan us money. Let’s see about those Cs…

“Character” is less about our personal charisma and more about our financial reputation. Do we pay our bills? Do we pay them on time? Are we now or have we previously been bankrupt? Are there any tax liens against us? Basically, if someone were to judge us solely on our financial history, would we look like a good person?

“Capacity” looks at how much we make and how much we owe, and tries to figure out if we can afford to pay back the loan we’re trying to get.

“Capital” is how much of our own money we can fork over toward whatever we’re trying to finance. For example, if we’re trying to buy a house, we’re more likely to get a loan if we can put down a 20% down payment versus only putting down a 10% down payment.

“Collateral” is stuff that we own that we can put up against a loan. Like...let’s say we’re trying to buy a vacation house in the Florida Keys. In order to secure the home loan, we put our house in Denver up for collateral. This means that, if we default on the Keys loan, the bank can get what we owe them from the value of our Colorado house.

And last but not least, certain “conditions” might come into play. Are we taking out a loan to add a garage onto our house, or are we just borrowing money for vague and unspecific purposes? Are we trying to grow a business that impeding regulations might shut down completely within the next year? Is the economy in general about to tank, making it less likely we’ll be able to repay the loan?

On the one hand, this can seem like a lot of stuff to keep track of. But on the other, we guess it’s nice to know that lenders are trying to get a big-picture view of our financial situation before they support—or crush—our financial dreams.

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Finance: What are credit ratings, and ho...59 Views

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finance a la shmoop what our credit ratings and how are they interpreted?

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well maybe you've heard your parents groan about all of their accumulated

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debt or at least you did in high school and you know how it's sinking them. your [kid asks for dinner]

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mom put the new fridge and dishwasher on her Amex and now it's all maxed out. your

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dad meanwhile invested in a new set of golf clubs and put his flight to Myrtle

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Beach on his visa, and now well your dad might have a nice tan and maybe he's

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shaved a few strokes off his game, but you and your sister are eating baked

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beans out of the can and taking time to 30-second showers to cut down on you

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know gas expenses, so credits evil right? you should only pay for something if

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you've got the cash right now in your pocket to pay for it right? well no not

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right it's true making purchases on credit and be abused and often is but

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building credit ie showing the rest of the world that you can borrow money and

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then pay off your purchases responsibly whether you're an individual or a

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corporation is absolutely essential in making your way through this vast [computer game labyrinth pictured]

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complicated world of ours and establishing your own credit rating. so

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what really is a credit rating ?well it's a determination of your ability to pay

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your debts fully and in a timely manner. all right well there are three major

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credit rating agencies who specialize in making these types of evaluations for

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the big boys ie large public corporations who borrow money all the

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time. the agencies well they're the ones with catchy names like Moody's Standard

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& Poor's and Fitch. note that these three are typically used to determine the

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reliability of businesses to pay off their debts.

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don't confuse credit rating agencies with credit reporting agencies, of which

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the major players are Equifax Experian and TransUnion. those guys publish credit

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reports assigning credit scores to individuals. so they determine whether

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you're able to get that Prius you've had your eye on or whether you can get [orange Prius pictured]

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the keys to a nice new condo or whether you can finally upgrade from your

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antique typewriter to Mac. but credit ratings indicate whether

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someone might want to trust this or that company to make good on their debts.

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check out this table which gives you the rundown of Moody's and SNP ratings right

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there. don't worry about Fitch for now they're low man on the totem pole .all

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right for Moody's anything rated be a three or better is considered investment

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grade. for S&P well it's anything triple b-minus or higher. so both agencies would [credit rating chart pictured]

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recommend investing in a company's debt at the top of their class, but for any

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failing below this line well they've kind of slapped a junk ish bond label on

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it. in other words you know and take your chances. the better the grade the better

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a company is done in keeping their books checking their boxes crossing their T's

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and dotting your I's and likely it means that they're a low risk. and so

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they get cheap interest rate. though the odds are paying back their debts are

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high when the risk is low and they're encouraged borrow more money until

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they're not a good credit risk. well the ones at the bottom of the barrel are

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payments don't spend well beyond your means and refrain from ordering one of

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everything off Amazon and you should be just fine. [woman shops from computer]

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