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How Creditors Measure Your Credit Rating
Creditors will measure your credit rating based on the
following three main things.
The three "C's" show creditors your:
- "Capacity" or income to pay the debt
- "Collateral" or assets to secure the obligation
- "Character" shows your compliance to repay the debt
1. Capacity
The very first question is whether you have sufficient income
to repay the debt. Creditors will definitely check to see if your
income exceeds your expenses so that you ca comfortably pay the
debt. A creditor will then want to know:
- Your income - from all sources
- Your fixed expenses
- Your other debts
The amount remaining from your total net income, after
deducting your fixed monthly expenses and other debts, is your
capacity. If your net income is $3,000 a month and your total
living expenses is $2,500, then your credit capacity is an amount
that requires no more than $500 in monthly payments.
If you now pay $400 a month for other credit obligations, then
your remaining capacity is a $100 a month, and a creditor should
extend you that amount of credit.
There are three techniques that will allow you to maximize
your income:
- Increase your income
- Decrease your expenses (easier to do than the first
one)
- Reduce your other debts
2. Collateral
A lender or creditor can be secured or unsecured. Secured
lenders hold a lien against specific assets, such as real estate,
an automobile, or boat. If you fail to pay, the secured lender
can sell the pledged asset to recover debt owed. Secured lenders
seldom loan more than the auction value of the collateral.
Secured credit, is an almost guaranteed way to rebuild your
credit. Even with poor credit, a lender may advance your credit
if you ca secure the credit with a lien against some valuable
asset. Many creditors extend credit entirely on the strength of
the pledged assets.
Other credit considerations are either ignored or carry
comparatively little weight in the credit decision.
What can you use as a collateral to secure your debts and
rebuild your credit? You may be appreciably wealthier than you
think. Add the value of your various assets (property that you
own) and subtract any existing mortgages or lies against those
assets. The difference is your equity or net worth in the
asset.
This is what you have available to secure a loan. Do not
overlook any asset:
- Home
- Investment real estate
- Stocks, bonds, mutual funds,
- Automobile
- Boats, planes, recreational vehicles
- Notes and mortgages due you
- Art, jewelry, antiques
- Pensions, IRAs, and Keoghs
- Royalty income
- Income from trusts
You may have other assets to pledge. The point is that
collateral gives you a borrowing power approximately equal to
your equity in your assets. Regardless of your credit history, if
you have collateral worth a solid $100,000, you should be able to
borrow close to that amount.
3. Character
Creditors next consider your character. How important this is
depends upon the type of credit, and who your creditors are.
Asset based lenders rely chiefly on collateral, and they are less
concerned with your character than are unsecured creditors who
can only rely on your prior reliability for honoring your
obligations.
When creditors check your character, they basically look at
how you satisfied your past obligations. Meaning they want to
know:
- How many credit defaults have you had?
- What was the reason for the defaults?
- How recent are they?
- Do you own your own home?
- If you rent, for how long have you rented the same
apartment or house?
- Do you have a checking account?
- Do you have a savings account with regular deposits?
- Do you have a payroll savings plan at work?
- Do you have a telephone in your own name?
- Do you have a criminal record?
- Have you filed bankruptcy?
Positive answers to these nine questions will often offset an
otherwise negative credit report. Basically your credit character
boils down to your credit history in the past. In the eyes of
creditors, if your past credit character is good, there is no
reason to believe why your future won't look promising.
About The Author
© Copyright. http://www.deleteuglycredit.com
Omar M. Omar is the owner of http://www.deleteuglycredit.com. The website is
dedicated to provide credit consumers with information about
their credit right and how to dispute inaccurate information on
their credit report. Omar M. Omar is also the author Of "The
Credit Repair Bible" book.
You have permission to publish this article electronically or
in print, in your Newsletter, on your website, or in your E-Book,
as long as the author's Resource Box is included with the
article.
omar@deleteuglycredit.com
MORE RESOURCES:
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