How Credit Decisions Are Made

Lenders review credit applications to decide whether you are a good credit risk. The more likely you are to pay back on time, current and future loans could be bigger and the cost to borrow much cheaper.

Similar to the Four C's in diamonds (cut, color, clarity and carat weight), when you apply for credit, lenders look at a different set of the "Four C's":

Capacity refers to your ability, present and future, to pay back the loan

If you do not have a good "track record" of steady income or profits, banks will often say no due to the high risk. Be ready to answer:

  • Who your employer is and how long you've been on the job?
  • Current monthly or annual income? (including income from any dependents)
  • How much your monthly living expenses are?

Capital refers to the value of your assets and total net worth

These assets could include cars, machinery, inventory but their liquidation value gets greatly depreciated. The best capital asset is CASH and that is what banks want to see. Be ready to answer:

  • Whether you own rent or own house(s)
  • Current balances in your checking, savings and retirement accounts
  • List of material assets (i.e. car(s), jewelry)

Character is your financial history; how you have paid your bill

Character information is most often obtained by your credit history. Factors that may affect your credit include, late payments, delinquencies, credit utilization and total debt. Your credit report will have a lot of the info they need but be ready to answer:

  • How many credit accounts you have and number of missed payments?
  • Can you provide a list of credit references?
  • Have you ever filed for bankruptcy?
  • What about outstanding judgments, repossessions, foreclosures and/or liens?

Consumers can request a free copy of their credit report every 12 months by going to This site is provided free of charge by the government and will include reports from the three major bureaus below.

  • Equifax
  • Experian (previously TRW)
  • TransUnion

Collateral is the cash and assets you have to secure a loan.

Having collateral at risk makes you more likely to pay the loan back, otherwise everyone could just walk away from their obligations. Be ready to answer:

  • Do you have any assets to provide as collateral to secure the loan in case you are unable to pay it off?
  • Proof that your assets have value in case they need to be liquidated by the bank