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How Credit Decisions are Made - The Four C's

When you apply for credit, the lender will review the Four C’s to decide whether you are a good credit risk (whether you are likely to pay back the loan on time).


Capacity refers to your present and future ability to meet your payments. In other words, do you make enough money to pay the loan on time every month? The lender may consider several factors when it comes to capacity.

  • How long have you been continuously employed with the same company, or same type of job? Generally, a lender would like to see that you have held the same job or same type of job for a least half a year.
  • How much money do you make each month?
  • What are your monthly expenses? A bank will compare the total amount you owe on credit cards and other loans, plus your other monthly expenses, with your monthly income. This is called a debit-to-income ratio. It helps determine how much money you can afford to borrow. The bank wants to ensure that your expenses are not too high for you to take on the additional monthly debt of a loan payment. They want to be sure you can repay what they lend.


Capital refers to the value of your assets and your net worth. Here are some of the questions that lenders will ask about capital:

  • How much money do you have in your checking and savings accounts? Lenders may want to know if you have any emergency funds to fall back on if you run into trouble.
  • Do you own a house? Homeownership means you are working at building wealth. If you run into problems paying your debts, your home could be a source for repayment.
  • Do you have investments or other assets (like a car)? Lenders want to determine the value of your assets. Lenders will also compare the difference between the value of your assets and the amount of debt you have. This is called net worth. A positive net worth demonstrates your ability to manage your money and build wealth.

Character & Credit Reports

Character refers to how you have paid your bills or debts in the past. Banks will use credit reports to obtain character information. Your credit report includes information on where you live, how you pay your bills, and whether you’ve been sued, or have filed for bankruptcy. The bank may use the information on your credit report to decide whether to approve your loan request, and perhaps even how much to charge you for the loan.

Lenders will look into these types of questions regarding your character.

  • How you had credit in the past? If you have no credit history of late payments, you will have an easier time getting your loan request approved.
  • How many credit accounts do you have? If you have never had a credit account, you may have difficulty getting approved for a loan. Having a good credit history shows a lender you can borrow money responsibly. Some lenders might let you demonstrate you will be a good risk by asking for proof that you pay your rent, utility, and phone bills on time or that you may regular deposits to a savings account. But, not all lenders will accept, as evidence of your credit-worthiness, obligations that are not filed with a credit bureau. You may have to shop around.
  • How you managed your credit accounts? A creditor will look at whether you have kept your promises to repay debts. A lender will see you as a greater risk to lend money to if you:
    • Filed for bankruptcy
    • Had any court judgements against you
    • Had property repossessed or foreclosed
    • Made late payments

These situations may make it more difficult for you to get approved for a loan. However, some lenders will ask you to explain what happened. Depending on your circumstances, a lender might be willing to approve your loan request.

There are several situations that might prevent you from getting a loan, or result in you paying much more for credit, particularly if you are currently going through them.

There are three major nationwide credit bureaus.

You can and should obtain your free credit report from each credit bureau once every twelve months. It pays to be sure the information is accurate, complete, and up-to-date before you apply for a loan.

To obtain a free annual credit report:

Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281


Collateral refers to property or assets offered to secure the loan. Collateral gives the lender comfort in making a loan to you, as the lender can seize the collateral and sell it to help pay off your loan if you do not repay the loan as you agreed to.

Do you have assets to secure the loan? Collateral is security you provide the lender. As we have seen, giving the lender collateral means that you pledge an asset that you own, such as your home, to the lender, with the agreement that it will be the repayment source in case you cannot repay the loan.

A co-signer can help you get a loan if you are unable to obtain one yourself. This person signs the loan documents with you and is equally responsible for repaying the loan if you cannot. The lender cannot insist that the co-signer be a specific person, such as your husband or wife, but it will have to be an adult with good credit.

Guard Against Predatory Lending Practices

Predatory lending occurs when companies offer loan products using certain marketing tactics, abusive collection tactics, and loan terms that deceive and exploit borrowers.

Predatory loans are usually more expensive than other loans or have repayment terms many consumers can’t meet. The best ways to guard against predatory loan transactions is to:

  • Deal with reputable loan providers
  • Shop around with several loan providers of your choice and obtain the best terms
  • Read and understand all terms and conditions of an offered loan
  • Ensure you can make payments according to the loan terms