Buying your first home is an incredible step in life, but it is not without its hurdles! One of which is demonstrating that you are creditworthy, which all comes down to your ability to manage credit. This is how lenders and credit agencies determine the interest rate you pay. A higher credit rating could mean a lower interest rate and save you thousands of dollars over the life of your mortgage.
There are several attributes that lenders consider before granting credit, and these are commonly referred to as the “Five C’s” and consist of: Character, Capacity, Capital, Collateral and Conditions. Let’s take a closer look at each:
Character
The first C focuses on you and your personal habits, specifically whether you have the nature to pay debts on time. It includes factors like whether you habitually pay your bills on time, have delinquent accounts, your total outstanding debt, and how you use your available credit.
Quick Tip: Using all or most of your available credit is not advised. It is better to increase your credit limit versus utilizing more than 70% of what is available each month. For instance, if you have a limit of $1,000 on your credit card, you should never go over $700. If you need to increase your score faster, a good place to start is using less than 30% of your credit limit. If you need to use more, pay off your credit cards early so you do not go above 30%.
Capacity
Capacity refers to your ability to pay back the loan and factors in your cash flow versus your outstanding debt, as well as your employment history. Lenders calculate this by taking your total monthly debt payments divided by your gross monthly income.
Capital
Capital is the amount of money that a borrower puts towards a potential loan. For mortgages, this is your down payment. A larger down payment often results in better rates and better terms.
Collateral
Collateral is what you pledge against the loan for security of repayment. For mortgages, lenders look at the value of the property and your overall net worth.
Conditions
Conditions refer to the terms of the loan, such as the interest rate, loan amount, and the purpose of the loan. Loans with specific purposes, like mortgages or home improvement loans, are generally more likely to be approved.
There is no better time than now to recognize the importance of your credit score and check if you are on track with the Five C’s. If you want more information, please don’t hesitate to reach out to us today!
