It’s Not All Credit Scores: Other Things Your Lender Might Be Looking At

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Your FICO score isn't the only thing lenders might look at when you apply for a loan. What else could they use? Welcome to the "5 C's" of credit.

When applying for a credit card, it’s relatively easy to get a seal of approval if your FICO score meets or exceeds the lender’s benchmark.

But that’s not necessarily the case with other types of loans, such as small business loans, personal loans or even some car loans and mortgages. In order to assume the risk you may bring to the table, some lenders might scrutinize a number of factors to determine if you’re a good fit.

In the video below, Money Talks News money expert Stacy Johnson offers tips on how to improve your credit score. Watch the video, then read on to learn about factors other than credit scores that a lender may consider.

The five C’s of credit

Lenders may also weigh another set of factors called the five C’s, or as Investopedia puts it, “five characteristics of the borrower, [that attempt] to gauge the chance of default.”

1. Character

Even if your credit score is through the roof, potential lenders may be interested in you personally as well as your credit profile, particularly for loans made to small businesses. Says the Minority Business Development Agency:

Character is the general impression you make on the prospective lender or investor. The lender will form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan …

Subjective opinions will normally be less important to most lenders than the things represented by the other C’s, but depending on the type of loan you’re getting, they could still play a role.

2. Capacity

Will you be able to keep up with the monthly payments that accompany the loan? Is your debt ratio (what you owe vs. what you own) below the lender’s acceptable limit?

To answer this question, potential lenders may evaluate your stream of income, both fixed and variable.

When analyzing your income, creditors will more than likely be interested in the duration of your employment to determine the stability of your income. Is there room for growth? Frequent job changes or extended breaks in employment can be a red flag.

Your outstanding debt to pretax income ratio, also known as the debt-income ratio, can also come up, especially for large loans such as mortgages.

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