Question

Discuss the five C’s of credit. Discuss how an individual can improve their credit score.

Answer 1

The Five C's of credit are:-

1) Character 2) Capacity 3) Capital 4) Collateral and 5) Credit History

Character – Will You Repay the Loan?
The first factor is character, which refers to a borrower's reputation.Sample Questions:How long have you lived at your present address?How long have you held your current job?

Capacity – Do you have the ability to repay a loan?
Banks compare income against recurring debts.Sample Questions:What is your salary?What are your current debts?

Capital –What are your Assets and Net Worth?
The lender will consider any capital the borrower puts toward a potential investment, because a large contribution by the borrower will lessen the chance of default.Sample Questions:What are your assets?What are your liabilities?

Collateral– What if you Don’t Repay the Loan?
Collateral, such as property or large assets, helps to secure the loan.If you fail to repay the loan, the creditor may take whatever you pledged as collateral.Sample Question:What do you have to secure the loan (a vehicle, a home, or furniture)?Collateral– What if you Don’t Repay the Loan?

Credit History – What is your Credit History?
The conditions of the loan, such as the interest rate and amount of principal, will influence the lender's desire to finance the borrower, depending on Credit HistorySample Question:Do you pay your bills on time?Have you ever filed for Bankruptcy?Credit History – What is your Credit History?

An individual can improve their credit score by following the following 10 strategies:-

Strategy 1: Pay Your Bills on Time.

Although this strategy may seem extremely obvious, late payments are the most common piece of negative information that appears on peoples' credit reports and are often responsible for significant drops in credit scores. When it comes to loans and credit cards, it's vital that you always make at least the minimum payments in a timely manner each and every month, with no exceptions.

Strategy 2: Keep Your Credit Card Balances Low.

The fact that you have credit cards impacts your credit score. Likewise, your payment history on those credit card accounts also impacts your score. Another factor that's considered in the calculation of your credit score is your credit card balances. Having a balance that represents 35 percent or more of your overall available credit limit on each card will actually hurt you, even if you make all of your payments on-time and consistently pay more than the minimum due.

Strategy 3: Having a Good History Counts, So Don't Close Unused Accounts.

One of the factors considered when calculating your credit score is the length of time you've had the credit established with each creditor. You're rewarded for having a positive, long-term history with each creditor, even if the account is inactive or not used. The longer your positive credit history is with each creditor, the better.

Strategy 4: Only Apply for Credit When It's Needed, Then Shop for the Best Rates on Loans and Credit Cards.

If you're in the market for a bunch of new appliances or other big-ticket items, it's common for consumers to walk into a retailer and be offered a discount and a good financing deal on a large purchase, if they open a charge or credit card account with that retailer. Before applying for that store's credit card, read the fine print. Determine what your interest rate will be and what fees are associated with the card.

Next, only apply for new credit if you absolutely need it. Applying for a retail store card you're going to use once or twice, when you could just as easily use an existing credit card, might not be the best idea. Applying for and obtaining multiple new credit cards (including store credit cards) within a several month period will be detrimental to your credit score. Unless you can save a significant amount of money on your purchase over time and can justify accepting a reduction in your credit score, don't apply for credit you don't actually need.

Strategy 5: Separate Your Accounts after a Divorce.

During a marriage, it's common for a couple to obtain joint credit card accounts and co-sign for various types of loans. Coming into the marriage, the information on each person's credit report and their credit score will eventually impact their spouse, especially when new joint accounts are opened or a spouse's name is added to existing accounts. Consolidating all your accounts once married makes record-keeping easier. If a couple gets divorced, however, this can create a whole new set of credit-related challenges.

First, understand that just because you obtain a legal divorce, it does not release one or both people from their financial obligations when it comes to paying off a joint account. As long as both names appear on the account, both parties are responsible for it.

As your divorce proceedings move forward, be sure to pay off and close all joint accounts, or have one person's name removed from each account, meaning only one person will remain responsible for it.

It will probably become necessary for one or both parties in the marriage to re-establish their independent credit. When doing this, start off slowly and build up your independent credit over a few years. Immediately applying for a handful of new credit cards, a new car loan and/or a new mortgage within a short period of time after your divorce won't help to improve your credit report and credit score. Try to spread out new credit card acquisitions and new loans by at least six months each.

In the event of a spouse's death, creditors can not automatically remove the deceased person's name from the joint account and make the debt the sole responsibility of the living spouse. It will be necessary to contact each creditor separately. In some cases, the widow or widower may need to reapply for the credit card or loan as an individual borrower. Keep in mind that several of the credit reporting agencies regularly update their records using information provided by the Social Security Administration. As a result, joint accounts that include someone who is deceased will be flagged when the creditors are notified.

Strategy 6: Correct Inaccuracies in Your Credit Reports, and Make Sure Old Information Is Removed.

One of the fastest and easiest ways to quickly give your credit score a boost is to carefully review all three of your credit reports and correct any erroneous or outdated information that's listed. If you spot incorrect information, you can initiate a dispute and potentially have it corrected or removed within 10 to 30 days.

Strategy 7: Avoid Excess Inquiries.

Every time you apply for a credit card or any type of loan, a potential creditor will make an inquiry with one or more of the credit reporting agencies (Experian, Equifax or TransUnion). This inquiry information gets added to your credit report and will typically remain listed for two years. For one year, however, the inquiry will slightly reduce your credit score. If you have multiple inquiries in a short period of time, this can dramatically reduce your credit score.

Keep in mind, when shopping for a mortgage or car loan, it's permissible to have multiple inquiries for the same purpose within a 30- to 45-day period, without those multiple inquiries hurting your credit score. In this situation, the multiple inquiries will be counted as one single inquiry.

Strategy 8: Avoid Bankruptcy, if Possible.

There are a lot of misconceptions about the pros and cons of filing for bankruptcy if you encounter serious financial problems. In terms of your credit report and credit score, filing for bankruptcy is one of the absolute worst things you can do. If your credit score hasn't already plummeted as a result of late payments, missed payments, and defaults, when the bankruptcy is listed on your credit report, you will notice a large and immediate drop in your credit score. Furthermore, that bankruptcy will continue to plague your credit report for up to ten years.

For most people, bankruptcy does not offer an easy way out of their financial responsibilities or offer a quick fix. Instead, you're setting yourself up for long-term financial difficulties, because obtaining any type of credit or loans in the future will be significantly more difficult. Many mortgage brokers (and lenders) and car loan financing companies will automatically reject applicants with bankruptcies listed on their credit reports.

If you do file for bankruptcy, the best thing you can do is slowly rebuild your credit by paying all of your bills on time from that point forward, with no exceptions. Rebuilding your credit in this situation will mostly likely take years, with no quick fixes available.

Strategy 9: Avoid Consolidating Balances onto One Credit Card.

Unless you can save a fortune in interest charges by consolidating balances onto one credit card, this strategy should be avoided. One reason to avoid this is that maxing out your credit card will detract from your credit score, even if you make on-time payments. Assuming the interest rate calculations make sense, you're better off distributing your debt over several low-interest credit cards. An alternative is to pay off high-interest credit card balances using another type of debt consolidation loan or by refinancing your mortgage with a cash-out option.

Strategy 10: Negotiate with Your Creditors.

Contrary to popular belief, your creditors aren't your enemies (at least they don't have to be). Your creditors are in business. The nature of business dictates that they earn a profit. When you don't pay your bills, that impacts a creditor's ability to do business and impacts its bottom line. Many creditors are willing to be understanding of difficult financial situations and short-term financial problems, especially if you openly communicate with them in a timely manner.

In other words, instead of skipping a handful of payments or defaulting on a loan, contact the creditor as soon as a problem arises and negotiate some form of resolution that's acceptable and within your financial means. Forcing a creditor to turn your debt over to a collection agency will simply cause you bigger problems in the future because many collection agencies are relentless when it comes to recovering money. Furthermore, the negative information that's placed on your credit report will have a long-term negative impact on your credit score.

Depending on the level of your financial difficulties, your creditors may be willing to do one or more of the following things to assist you, assuming you make the effort and show good faith in contacting them to discuss your situation:

Reduce your interest rate.

Reduce your monthly minimum payment.

Waive extra finance charges and late fees.

Allow you to skip one or more monthly payments (and extend the length of the loan).

Close the account and allow you to make affordable payments to slowly reduce the outstanding balance over time.

Close the account and accept a settlement for less than the amount you actually owe.

Allow you to refinance the loan at a lower interest rate and/or for a longer term to reduce your monthly payments.