Some of us can and do pay cash for everything we buy, but most of us take advantage of consumer credit to get things we need now -- and pay for them later. When you're ready to apply for credit, you should know what factors creditors think are important in deciding whether you're creditworthy. This guide is designed to detail the loan process.
The Three Cs. On their loan applications, creditors look for an ability to repay debt and a willingness to do so -- and sometimes for a little extra security to protect their loans. They speak of the three Cs of credit: capacity, character, and collateral.
Capacity -- Can you repay the debt? Creditors ask for employment information: your occupation, how long you've worked, and how much you earn. They also want to know your expenses: how many dependents you have, whether you pay alimony or child support, and the amount of your other obligations.
Character -- Will you repay the debt? Creditors will look at your credit history: how much you owe, how often you borrow, whether you pay bills on time, and whether you live within your means. They also look for signs of stability: how long you've lived at your present address, whether you own or rent your home, and the length of your present employment.
Collateral -- Is the creditor fully protected if you fail to repay? Creditors want to know what you may have that could be used to back up or secure your loan and other resources you have for repaying debt other than income, such as savings, investments, or property.
Creditors use different combinations of these facts to reach their decisions. Some set unusually high standards; others simply do not make certain kinds of loans. Creditors also use different rating systems. Some rely strictly on their own instinct and experience. Others use a " credit-scoring " or statistical system to predict whether you're a good credit risk. They assign a certain number of points to each of the various characteristics that have proved to be reliable signs that a borrower will repay. Then they rate you on this scale.
Different creditors may reach different conclusions based on the same set of facts. One may find you an acceptable risk, whereas another may deny you a loan.
Your gender or race may not be used to discourage you from applying for a loan. And creditors may not hold up or otherwise delay your application on those grounds. Under the Equal Credit Opportunity Act, you must be notified within 30 days after your application has been completed whether your loan has been approved or not. If credit is denied, this notice must be in writing, and it must explain the specific reasons that you were denied credit or tell you of your right to ask for an explanation. You have the same rights if an account you have had is closed.
If you are denied credit, be sure to find out why. Remember, you may have to ask the creditors for this explanation. It may be that the creditor thinks you have requested more money than you can repay on your income. It may be that you have not been employed or lived long enough in the community. You can discuss terms with the creditor and ways to improve your creditworthiness.