The 4 C’s of Credit

The following is written primarily for those wishing to obtain a mortgage. However the same dynamics apply to credit cards, vehicle loans, insurance, employment opportunities and even dating eligibility.

Character – Reputation is a key factor in obtaining new credit. Bankruptcy, foreclosure, late payments, settlements, collections, judgments, charge-offs and other derogatory events weigh how your credit character is measured. A short-cut for evaluating character is the credit score.

Capacity – Is the ability to repay the obligation provable with third party documentation? This is measured by the stability of the income, and how long the wage-earner or self-employed has generated that income.

Conditions – What is the purpose of the loan? If the purpose is to refinance for a rate or term improvement, a simple letter stating such suffices. If applying for a cash-out refinance, how are the proceeds to be used? Documentation is required to explain the perceived additional risk. In situations where Character is less than stellar, a cash-out refinance for the purpose, for example, reimburse a family member could jeopardize loan approval.

Collateral – How much equity is available to protect the investor? In a purchase or refinance, this is the percentage of Down Payment/Equity vs Appraised Value and the loan amount. The lower the loan amount to the equity, the stronger

For example, when the character and/or the credit are challenged a down payment/equity position of about thirty percent can mitigate two of the “C’s”.   The greater the collateral/equity, a lesser weight may be given to Character, Capacity.

What is your credit score? Use this credit score simulator to find out. It’s free and it will give you a good idea of what your score range is right now.

Caution – Finally, be very wary of credit repair schemes, many are designed to part you from your hard earned money. Most of these “service providers” are scams. It’s easy to see if they are running a scam. The scammers require cash up-front; this is not legal. Pursuant to the Credit Repair Organization Act (CROA), any credit repair work must be completed before a consumer may be charged for the work. For more information, see: Credit Repair Basics.

Image attribution

Financially Speaking™ James Spray RMLO, CNE, FICO Pro | CO LMO 100008715 | NMLS 257365 |October 19, 2015

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct for your situation. This information is not legal advice and is for guidance only. You may reproduce this information in whole and not in part, providing you give full attribution to James Spray.

2 comments on “The 4 C’s of Credit

  1. Jim Lachenmaier says:

    Haven’t looked in on you in years James. You and Terri Dunn got me through a bankruptcy  Hope this finds you well. Jim Lachenmaier


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