Definition:
Credit criteria are several factors, such as your payment history, income, and overall financial situation. Lenders refer to your credit criteria when you apply for a loan or line of credit so they can assess the type of credit risk you represent as a borrower.
Definition and Examples of Credit Criteria
Credit criteria are what lenders use to evaluate your ability to repay, or how likely you are to pay back the money you borrowed. Your ability to repay may also be taken into account when you try to rent an apartment or look for a lower insurance rate. While lenders may look at factors ranging from your debt repayment history to how much income you earn, they take a serious look at “5 things starting with the letter C” for credit. This is a common term used by financial institutions, so you will often hear credit criteria referred to by this name.
Alternative Name: 5 Things Starting with the Letter C
The 5 things starting with the letter C in credit are as follows:
- Credit History
- Capacity
- Collateral (if you applied for a secured loan)
- Capital
- Conditions
Many lenders may also take a look at your credit score as an indicator of your ability to repay. Credit bureaus take information from your credit report to form your credit score, such as payment history, outstanding balances, new credit inquiries, the length of your credit history, and the types of credit accounts you currently have open.
How Do Credit Criteria Work?
It’s important to understand what your credit report is, as many lenders review your report when checking whether you meet their credit criteria.
Note: Your credit report contains important information about your financial life, such as any current debts you have, your bill payment history, and personal information like where you live and work.
Your credit report even contains information regarding whether you have been sued, arrested, or filed for bankruptcy in the past. Lenders use credit reports to help them determine whether they should extend you credit and if so, what interest rate they should charge you. Employers, landlords, and insurance companies may also review your credit report.
Let’s expand on those key factors that make up credit criteria and how to ensure you meet the necessary standards to be considered a responsible borrower.
Payment History
Your payment history looks at whether you have made payments on time for previous and current credit accounts. If you missed a payment, had a credit account sent to collections, or filed for bankruptcy, your credit score could be affected by that.
Credit Utilization
The amount of available credit you are currently using is a key element of credit criteria that can impact your credit score. Your utilization rate compares the amount of credit you have used to the total amount you have available. The less of your available credit you use, the better.
Credit History
The length of your oldest and newest credit accounts, along with the average age of all your credit accounts, is taken into consideration by creditors. Having a longer credit history and demonstrating good credit habits during that time can work in your favor.
Your overall credit history looks at many of the factors mentioned in this article and gives a snapshot of how you have managed credit over the years. Your credit report is a detailed account of your credit history.
Credit Mix
The types of credit accounts you have open (i.e., your credit mix) can give lenders confidence that you can manage multiple types of credit accounts at once.
Capacity
What
If you are able to handle your payments, this is a key type of credit criterion that lenders will consider. They may take into account your income and employment history when looking at whether you will be able to repay the debts owed while balancing your living expenses.
Collateral
If you have applied for a secured credit product like a car loan, you will need to provide collateral to back the loan. The value of the collateral you provide will play a significant role in the lender’s decision regarding the secured credit product.
Note: If you fail to repay a secured loan, the lender can seize your collateral to recover their losses.
Capital
Although your household income is what you are assumed to use to repay your loan, lenders also look at your current capital (savings, investments, assets, etc.). They do this to determine whether you would be able to repay your loan in case you lose your job or experience a financial shock.
Conditions
Depending on the type of loan, the lender may ask how the borrower plans to use the loan and takes that answer into consideration. The lender may also consider other conditions, such as environmental and economic factors that may affect the project’s outcome.
Taking the above factors into account, lenders evaluate your credit criteria to determine the level of credit risk you represent. Credit criteria consist of several factors like your repayment history and your income. Companies can review multiple aspects of your credit criteria by looking at your credit report.
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Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and maintain the accuracy, reliability, and quality of our content.
Wells Fargo. “Know What Lenders Look For.” Accessed Oct. 1, 2021.
USA.gov. “Credit Reports and Scores.” Accessed Oct. 1, 2021.
Consumer Financial Protection Bureau. “Credit Score Myths That Might Be Holding You Back From Improving Your Credit.” Accessed Oct. 1, 2021.
Source: https://www.thebalancemoney.com/what-are-credit-criteria-5204312
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