Are You Creditworthy?

Creditors and lenders must assess your "creditworthiness" – your ability to pay back a debt – before issuing credit to you. Creditors want to know that you'll pay them back. The process that determines your creditworthiness involves three areas of your financial situation, "the three C's":

Capacity

Income stability
Employment history
Amount in savings
Monthly debt payments (credit card bills, car loans, etc.) compared to your income

Collateral

Land or property
Other valuable assets

Credit

Credit history
On-time payment of mortgage or rent, utilities and other household bills

You must have enough of these three C's for the creditor to take a risk by granting you credit. To review your three C's, creditors ask for a financial statement. This statement gives the creditor a picture of your financial situation and credit history.

Your strength in one area can cancel out your weakness in another. The lender sees the strength as a "compensating factor" for the weakness. For example, if you own a home (strong collateral), but your credit history contains several late payments (weak credit), the lender may not penalize you for your weak credit because you have such strong collateral.

Creditors use these three primary factors, the three C's, to determine whether they should grant you credit. Creditors want to know that you'll pay them back. If creditors can determine that you're worth the risk, then they consider you creditworthy.


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