4 C’s of Credit and How Your Score is Determined



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4 C’s of Credit and How Your Score is Determined

Your credit score – also known as the big ‘C’ of the 21st century – is a numerical figure determined by your financial performance. It’s a lot like a GPA. Except instead of grades, the three-digit score is determined by the 4 C’s of Credit: character, capacity, capital, and collateral.

Companies like Experian, TransUnion and Equifax (the three major credit bureaus) use the 4 C’s of credit to grade your creditworthiness on a scale of 300 to 850. The higher the number, the better. Even a few points can make a significant difference in determining the interest rate for which you qualify.

How the 4 C’s of Credit Determine Your Score


In the world of credit scores, character refers to your track record – how consistently or inconsistently you have repaid your debts. This information is listed on your credit report. It includes a detailed history of how much you have borrowed and the consistency with which you’ve made payments.

The report also includes information about any collection accounts, judgements, liens, and/or bankruptcies you retain. Typically, a report goes back seven years. For borrowers who have had some hiccups earlier in life, this means those mistakes won’t follow them forever.

HINT: It’s never too late to start building a strong credit history.


Capacity takes into account your ability to repay a loan. It does so by looking at your debt-to-income (DTI) ratio. DTI is determined by evaluating your total income (how much money you bring home) verses your total recurring debts (how many financial demands you have).

These demands can include credit card payments, student loans, car payments, and existing mortgages. It’s typically recommended your DTI is no higher than 38%. Your loan officer will want you to stay within this DTI ratio even with the addition of your prospective housing payment, which includes your principal, interest, taxes, and insurance.

It’s also important to note that the length of time you’ve worked at your job and your job stability are taken into account when determining capacity.


Your capital is your stuff. The money you have in the bank and/or the assets you own. For most borrowers, capital is typically cash and/or equity in another property. The more capital you have, the less likely you are to default on your mortgage and the more trustworthy you’re considered as a borrower.

HINT: While it’s likely you’ll use a large amount of your capital in the form of a down payment, it’s also a good idea to have some money in a ‘reserve fund’ (aka an emergency fund). This surplus cash gives you a buffer in the event you lose your job or incur unexpected expenses, so you can keep making your mortgage payment even if your income decreases for a time period.


It’s no secret a home loan is a big chunk of change. Collateral gives the lender some protection. In the event you fail to make your mortgage payment (aka default), the lender can repossess the collateral as payment. In most cases, collateral is a physical asset. For example, the collateral on a car loan is often the car and for a mortgage it’s often the home.

What’s a Good Credit Score?

In most cases, a borrower will be required to have at least a 650 credit score in order to qualify for a loan. FICO breaks scores down into the following categories:

  • Excellent Credit: 750+
  • Good Credit:700-749
  • Fair Credit:650-699
  • Poor Credit:600-649
  • Bad Credit:below 600

Even raising your credit score from 675 to 700 can substantially improve your interest rate and reduce the overall cost of your loan.

Are There Other Factors a Lender Considers?

In addition to the 4 C’s of credit, a lender will also take into account the conditions under which the loan is being approved. Conditions refer to how you intend to use the loan. For instance, a lender considers a primary residence different than a secondary residence, such as a vacation home.

A loan for a primary residence is considered less risky because it’s harder to walk away from a home in which you are living. The lower the risk a lender is taking, the lower the interest rate for which you’ll typically qualify.

How Can I Improve My Credit Score?

The first step to improving your credit score is to know your credit score. Fairway Kirkland’s loan officers can help you look at your credit score and evaluate your credit report to start making improvement.

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*A pre-qualification is not an approval of credit and does not signify that underwriting requirements have been met.

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