In the highly competitive world of financial lending, borrowers often shop around to find the best rate available. One of the biggest negotiating tools a consumer has is a good credit score.

There are several things a financial institution will look at when considering an application for a loan, line of credit or mortgage.  Known commonly as the 5 C’s of credit, these traits are character, collateral, capital, capacity and conditions.  Your credit report falls into both the character portion as well as the capacity portion of loan approvals, therefore it’s critical to use your credit score to your best advantage.

When we discuss the character of the applicant, it generally means integrity.  Once upon a time, when the five C’s became the lending mantra, clients had personal relationships with their bankers.  Gone is the day when you walked into the bank for all your needs and knew the bank manager and all the staff by first name.  While being an upstanding citizen is still important, credit grantors generally look to the consumer credit report to determine the client’s character.  

Do you always pay your bills on time?  Do you have long term business relationships with other lenders?  Do you have an outstanding court order or judgement against you?  Yes, that pile of unpaid parking tickets could end up on your credit report, degrading your character in the eyes of a lender.

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Capacity refers to cash-flow.  Do you have enough income to pay all your bills, including the one you are applying for?  Once again, lending institutions will check the balances of your current credit lines and work it against your income to see if you will have room to meet all your obligations.  Having high balances owing can make it difficult to get a loan.  However, low balances, even when you have high available limits, helps your cash to debt ratios, and also shows that you have the necessary discipline needed to pay bills on time and not overspend.  

When applying for credit products, a strong credit score and report will give you a better deal.  Known in the industry as risk-based pricing, it means that consumers with good credit and a proven ability to pay their debts are given better interest rates and qualify for special offers.  Knowing where you stand in terms of creditworthiness before applying for a new product will give you the advantage to make sure you get the best deal possible.  

Before you visit a bank or financial institution, get a copy of your credit report from the credit reporting agencies, Equifax, TransUnion and Experian.  Make a thorough review to check for errors or possible problems that could hurt your application.  Suffice to say, good credit not only helps you qualify for new loans, but it enables you to save money with lower interest rates and more generous and open terms.