In extending someone credit, lenders typically consider what is called the “5 Cs of Credit” – collateral, capital, capacity, character, and conditions. Collateral and capital are those items you own of value that could be taken from you or sold in the event you do not pay your bill. Capacity and character examine your ability to repay a loan and includes such things as your employment history, income, and history of paying bills. (For more, see How a Credit Score is Calculated in the box on the first page.) Conditions relate to the specifics of the loan being applied for -- the interest rate and the amount of money being borrowed (the principal). Just making the minimum monthly credit card payment doesn’t necessarily mean the card holder is managing this financial tool in the most advantageous way. In assisting people in paying off debt, credit counselors look for several danger signs.
Credit Card Danger Signs
- The person doesn’t know the total amount owed.
- Credit cards are maxed out, meaning the person has used the complete line of credit available to him or her on each card.
- New accounts are being opened to pay old debt.
- The person has a negative net worth.
- The person has been denied credit.
- Creditors are starting to call about the debt.
- Family members are not aware of the truth about the total debt.
Build a Positive Credit History
While you can’t “repair” your credit history, you can begin today to build a new track record of debt management that will positively influence your credit history. Lenders are reassured by a history of timely bill payment and a consistent pattern of personal savings. Limit the number of credit cards and loans you have. Maintain a low balance on one card and pay it off each month. Finally, devise a workable plan to live within your monthly income and avoid using credit for consumable items that are gone long before the bill is paid off.
Need More Resources?
Make sure to visit the other sections dealing with credit management: