Free Annual Credit Report

When you apply for credit, creditors use two primary methods to evaluate your request, especially when viewing your free annual credit report. What most credit lenders do is:

• Weigh your three “Cs”—capacity, collateral and character, and
• Create a “risk score” based on the information in your free credit report.

What are the Three ‘Cs’ of Credit Risk Rating

A creditor needs information to determine the likelihood that you will repay a loan or pay charges you incur on a line of revolving credit. This is done by evaluating the three “Cs.”

Capacity. This refers to the amount of debts you can realistically pay given your income. Creditors look at how long you’ve been on your job, your income level and the likelihood that it will increase over time. They also look to see that you’re in a stable job or at least a stable job industry. It’s important when you fill out a credit application to make your job sound stable, high-level and even “professional.” Are you a secretary or are you an executive secretary or the office manager? Finally, creditors examine your existing credit relationships, such as credit cards, bank loans and mortgages. They want to know your credit limits (you may be denied additional credit if you already
have a lot of open credit lines), your current credit report balances, how long you’ve had each account and your payment history—whether you pay late or on time.

Collateral. Creditors like to see that you have assets that they can take from you if you don’t pay your debt. Owning a home or liquid assets such as a mutual fund may offer considerable comfort to a creditor reviewing an application. This is especially true if your credit report has negative notations in it, such as late payments.

Character. Creditors develop a feeling of your financial character through objective factors that show stability. These include the length of your residency, the length of your employment, whether you rent or own your home (you’re more likely to stay put if you own) and whether you have checking and savings accounts.

These 3 basic principles are essentially what loan officers and creditors are looking for when they run a credit check on your and view your credit report. It is important that you have a good grasp on where you stand financial: this is where your free annual credit report comes in. Make sure you know what your current credit rating and risk score is so you will know what the loan officers see when they evaluate you.