The Three Cs. Creditors look for an ability to repay debt and a willingness to do so and sometimes for a little extra security to protect their loans. They speak of the three Cs of credit: capacity, character, and collateral.Capacity. Can you repay the debt? Creditors ask for employment information: your occupation, how long you have worked, and how much you earn. They also want to know your expenses: how many dependents you have, whether you pay alimony or child support, and the amount of your other obligations.Character. Will you repay the debt? Creditors will look at your credit history (see section on Credit Histories and Records): how much you owe, how often you borrow, whether you pay bills on time, and whether you live within your means. They also look for signs of stability: how long you've lived at your present address, whether you own or rent your home, and the length of your present employment.
Collateral. Is the creditor fully protected if you fail to repay? Creditors want to know what you may have that could be used to back up or secure your loan and other resources you have for repaying debt other than income, such as savings, investments, or property.
Creditors use different combinations of these facts to reach their decisions. Some set unusually high standards; others simply do not make certain kinds of loans. Creditors also use different rating systems. Some rely strictly on their own instinct and experience. Others use a "credit-scoring" or statistical system to predict whether you're a good credit risk. They assign a certain number of points to each of the various characteristics that have proved to be reliable signs that a borrower will repay. Then they rate you on this scale.
Different creditors may reach different conclusions based on the same set of facts. One may find you an acceptable risk, whereas another may deny you a loan.
The Equal Credit Opportunity Act does not guarantee that you will get credit. You must still pass the creditors' tests of creditworthiness. But the creditor must apply these tests fairly and impartially. The act bars discrimination based on age, gender, marital status, race, color, religion, and national origin. The act also bars discrimination because you receive public income, such as veterans benefits, welfare or social security, or because you exercise your rights under federal credit laws, such as filing a billing error notice with a creditor. This protection means that a creditor may not use any of these grounds as a reason to
• discourage you from applying for a loan
• refuse you a loan if you qualify
• lend you money on terms different from those granted another person with similar income, expenses, credit history, and collateral
• close an existing account because of age, gender, marital status, race, color, religion, national origin, receipt of public income or because you exercise your rights under federal credit laws.
Although creditors may not discriminate on the basis of national origin, they may consider your immigration status when making a loan decision.
Age. In the past, many older persons have complained about being denied credit because they were over a certain age. Or when they retired, they often found their credit suddenly cut off or reduced. So the law is very specific about how a person's age may be used in credit decisions.
A creditor may ask your age, but if you're old enough to sign a binding contract (usually 18 or 21 years old depending on state law), a creditor may not:
• turn you down, offer you less credit, or offer you less favorable credit terms because of your age
• ignore your retirement income in evaluating your application
• close your credit account or require you to reapply for it because you reach a certain age or retire
• deny you credit or close your account because credit life insurance or other credit-related insurance is not available to a person of your age.
Creditors may score your age in a credit-scoring system, but if you are 62 or older you must be given at least as many points for age as any person under 62.
Because individuals' financial situations can change at different ages, the law lets creditors consider certain information related to age, such as how long until you retire or how long your income will continue. An older applicant might not qualify for a large loan with a very low down payment and a long term, but might qualify for a smaller loan, with a larger down payment, and a shorter term. Remember that although declining income may be a handicap if you are older, you can usually offer a solid credit history to your advantage. The creditor has to consider all the facts and apply the usual standards of creditworthiness to your particular situation.
Public Assistance. You may not be denied credit just because you receive social security or public assistance, such as Temporary Assistance to Needy Families (TANF). But as is the case with age, certain information on this source of income could clearly affect creditworthiness. A creditor may consider such things as how old your dependents are (because you may lose benefits when they reach a certain age) or whether you will continue to meet the eligibility requirements for receiving benefits.
This information helps the creditor determine the likelihood that your public-assistance income will continue.
Housing Loans. The Equal Credit Opportunity Act covers your application for a mortgage or home-improvement loan. The act bars discrimination because of characteristics such as your race, color, gender or because of the race or national origin of the people in the neighborhood where you live or want to buy your home. Creditors may not use any appraisal of the value of the property that considers the race of the people in the neighborhood.
Also, you are entitled to receive a copy of an appraisal report that you paid for in connection with an application for credit, provided you make a written request for the report.
1. Credit cards are just like a loan-you have to pay what you owe.
2. Keep track of how much you spend. Remember that incidental and impulse purchases add up fast.
3. Save your receipts. Compare them with your monthly bill. Promptly report problems to the company that issued the card.
4. Never lend your card to anyone.
5. Owing more than you can repay can damage your credit rating. That can make it hard to finance a car, rent an apartment, get insurance-even get a job.
6. Pay your bill on time, and in full when possible. If you don't, you'll have to pay finance charges on the unpaid balance-and it takes forever to get caught up if you just pay the minimum.
Federal law limits your liability for unauthorized charges to $50 per card.