Good Credit Alone does not qualify you for a Loan
There is a general misconception among potential borrowers that good credit rating guarantees a person an approval for a loan. There are three basic requirements a bank is looking for an applicant to qualify for a loan. These are commonly called, the “three Cs of credit”.
These are good Credit Rating, Capacity to pay and Collateral.
Good credit rating means you always pay your monthly credit obligations on time. These payments are reflected on your credit bureau file. Capacity to pay means you have a permanent good paying job where you’ve been working for at least two years. Collateral is a personal or real estate property with sufficient value to secure payment of your debts in case of default. In the event you default on your payments, a lender could seize the subject property and sell it to pay for your debt. However, a lender may waive the collateral requirement if the amount of loan is relatively small, as in the case of credit cards.
The three Cs of credit work this way: If a person applies for a loan with a good credit rating but has unstable job, a lender would decline the application. Similarly, if a person has a stable job but with bad credit rating, a lender would disapprove his application and finally, if a person has a good credit rating and stable income, but there is no sufficient collateral, a lender would reject his application
Furthermore, although a person meets the three Cs of credit a lender may still decline a credit application if the applicant is loaded with so much debt that his income is not enough to pay the monthly payments. In the loan terminology, the person is said to have a high Debt Service Ratio. .
If you are loaded with debts and you are obsessed of maintaining your good credit despite your inability of securing a loan or credit, maybe it is time for you to evaluate your financial situation and focus on settling or wiping out your debts first, and reestablish your credit rating later.
If you need further information about mortgage or debt problems, contact
Ken Ntiamoa, MBA
BIA Insolvency Counsellor
(416-398-1877 ext 201)