9. How are credit-granting decisions made?
Potential creditors review credit applications primarily in relation to risk. They try to predict whether you’ll repay your debts on time by evaluating your character, capacity and collateral/capital.
- Character: Your length of residency and employment history help credit grantors develop a feeling about your personal stability. They get this information from your credit application. Lenders evaluate your financial character by reviewing your existing credit relationships: credit cards, bank loans, mortgages, etc. This information primarily comes from your credit report. A history of consistently making payments on time is the most critical reflection of your good credit character.
- Capacity: Your income, open credit limits, current debts and other payments give lenders a sense of how much additional debt you realistically can pay. Income is taken from your credit application or by checking directly with your employer. On a credit report, an important measure of capacity is your total outstanding balances compared with your total credit limits.
- Collateral/Capital: Whether the loan is secured by a down payment or an asset – and how much that down payment or asset is worth – helps lenders determine the terms of the credit or loan they extend to you. This factor is often a consideration in installment loans, which require fixed monthly payments.