Whenever you apply for credit, reputable creditors evaluate your application according to three basic criteria: your character, capacity and collateral. They decide how you measure up against these three criteria by reviewing your credit history and checking out your credit score. They may also ask you to provide them with detailed information about your assets and your debts. How the three C's of credit work:
- Your character:
To assess your character, creditors review your credit record information to find out if you've failed to pay your credit accounts on time, stopped paying your child support, been sued by any of your creditors, filed for bankruptcy, and so on. Although having this sort of information in your credit history does not necessarily mean that you're a bad person, it's definitely not helpful when you apply for credit.
- Your capacity:
Creditors don't want to give you credit unless they believe that you can afford to repay it. To find out if you can and to determine how much credit to give you, creditors review your income, find out the amount of debt you already have, and perhaps evaluate your assets. They will also have a look at your credit history to see if you have applied for a lot of credit and if you have, they may see you as a credit risk. This means that they might not give you any credit at all, less than what you've asked for or charge you a higher interest rate and may require you to secure an asset for the credit.
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- Your collateral:
If you apply for a lot of credit and your credit history is not great, creditors will look at your assets as your collateral to secure the credit. If you don't have any assets they will probably turn down your request for credit.