Credit evaluation and approval is the process a business or an individual must go through to become eligible for a loan or to pay for goods and services over an extended period. It also refers to the process businesses or lenders undertake when evaluating a request for credit.
Therefore it’s your creditworthiness that’s being determined. In addition, creditworthiness considers other factors such as age, income, financial obligations, employment status, and total debt owed, types of accounts, length of payment history and the ability to repay debt. It determines the interest rate, fees and terms and conditions of a credit card or loan.
This then means there are factors that lenders consider when making loans in regards to the 5 C’s of Credit is that they look at capacity. This is because lenders need to determine whether you can comfortably afford your payments. Your income and employment history are good indicators of your ability to repay outstanding debt. Income amount, stability, and type of income may all be considered.
This is because when one calculates the creditworthiness of a business or an individual. It involves the evaluation of the ability of a company or individual to honour their financial obligations. For example the audited financial statements of a large company might be analysed when it issues or has issued bonds.
Another important “C” in the 5 C’s of Credit is the character of the borrower as discussed by lenders. This means doing what you say you’re going to do. This goes for both borrowers and lenders. Good character is exhibited through open and honest communication with suppliers, lenders, customers, neighbours, partners and family members, as well as employees.
Good character is developing and following a solid business and financial plan, and being lean and mean in tough economic times. It’s making the necessary sacrifices to pay bills and expenses on time. It’s a “no excuse” attitude of accountability, trust and ethics. Character is often the forgotten “C” during good economic times, only appearing to exhibit its true colors in the face of adversity.