5 Cs of credit - What lenders look for

Qualifying for the different types of credit hinges largely on your credit history — the track record you’ve established while managing credit and making payments over time. Your credit report is primarily a detailed list of your credit history, consisting of information provided by lenders that have extended credit to you. While information may vary from one credit reporting agency to another, the credit reports include the same types of information, such as the names of lenders that have extended credit to you, types of credit you have, your payment history, and more. You can get a free copy of your credit report every 12 months from each of the 3 major credit reporting companies (Equifax^®, TransUnion^®, and Experian^®) at annualcreditreport.com.

In addition to the credit report, lenders may also use a credit score that is a numeric value – usually between 300 and 850 – based on the information contained in your credit report. The credit score serves as a risk indicator for the lender based on your credit history. Generally, the higher the score, the lower the risk. Credit bureau scores are often called "FICO^® Scores" because many credit bureau scores used in the U.S. are produced from software developed by Fair Isaac Corporation (FICO). While many lenders use credit scores to help them make their lending decisions, each lender has its own criteria, depending on the level of risk it finds acceptable for a given credit product.

Lenders need to determine whether you can comfortably afford your payments. Your income and employment history are good indicators of your ability to repay outstanding debt. Income amount, stability, and type of income may all be considered. The ratio of your current and any new debt as compared to your before-tax income, known as debt-to-income ratio (DTI), may be evaluated. Learn more about DTI and use our online calculator to see where you stand and get answers to common questions.

Loans, lines of credit, or credit cards you apply for may be secured or unsecured. With a secured product, such as an auto or home equity loan, you pledge something you own as collateral. The value of your collateral will be evaluated, and any existing debt secured by that collateral will be subtracted from the value. The remaining equity will play a factor in the lending decision. Keep in mind, with a secured loan, the assets you pledge as collateral are at risk if you don’t repay the loan as agreed.

While your household income is expected to be the primary source of repayment, capital represents the savings, investments, and other assets that can help repay the loan. This may be helpful if you lose your job or experience other setbacks.

Lenders may want to know how you plan to use the money and will consider the loan’s purpose, such as whether the loan will be used to purchase a vehicle or other property. Other factors, such as environmental and economic conditions, may also be considered.