Explain the four C’s of credit. Which is the most important and why?
Character – integrity is very important in determining the creditworthiness of an individual. Past performance on other debts should be considered. A credit score that determines credit worthiness by tracking late payments, over credit limit usage, past due accounts, total debt, and available credit.
Capacity – the debtor having sufficient cash flow to cover all their expenses and debt. The ability to generate income to pay back the debt.
Capital – net worth of the individual. Net worth is your current assets (assets convertible to cash within one year) less your current liabilities (liabilities due within one year). Having sufficient capital to cover your debt is a major requirement to extending credit.
Collateral – assets to pledge for the debt. Collateral is the assets or cash used to secure the debt. If the credit extended goes in default then the collateral will be forfeited to pay for the debt.
Collateral is the most important because is you have sufficient and the proper collateral to cover the debt and the debt goes into default then you can recover your losses by applying the collateral to your outstanding credit with the debtor.
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