Money, Health, and Other Things

Educational Blog in the Area of Family and Consumer Sciences for the Middle Peninsula

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The Five Cs of Credit, Part II

This week we’ll wrap up the Five Cs of Credit!

The third C is Capital. Capital is the amount a borrower is willing to put towards a potential investment. With credit, this is generally referring to a down payment. The larger the capital contribution, the less likely a borrower is to default. Many lenders, especially in the housing market, have minimum down payments for their collateralized loans, which are loans to purchase large assets like homes and cars. A larger down payment may help with your eligibility and in some cases may even qualify you for lower interest rates. There are also personal benefits to larger down payments; a larger down payment means lower future monthly payments, less interest over the life of the loan, and you’ll be less likely to go under water on your loan, meaning you owe more on the loan than the value of the asset, which is especially risky when it comes to car loans with small down payments.

The fourth C is Collateral. Collateral represent what the lender gets if the borrower defaults. This can be a number of financial assets, but very often it’s the asset your purchasing itself. If you don’t pay for car loan, the lender can repossess your car, if you don’t pay your mortgage for several months, they can start the foreclosure process. Loans with collateral are generally considered to be less risky, since the lender has a more straightforward recourse if you default. This is why you’re credit card and personal loan interest rates are likely higher than your auto loans or mortgages.

The fifth and final C is Conditions. Generally, this is referring to market conditions – the state of the economy, trends in that industry, and other external factors beyond your control. For instance, from about 2009 to 2016, interest rates were at record lows. A prospective borrower with identical creditworthiness may have dealt with interest rates multiple percentage points higher in 2007 than just five years later in 2012.

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The Five Cs of Credit, Part I

Over the next two weeks, we’ll discuss the Five Cs of Credit – what they are, how they’re applied, and why they’re important to you as the borrower.

Let’s start with the what the Five Cs of Credit are. The Five Cs are five criteria that most lenders will use to measure the creditworthiness of potential borrowers. This allows lenders to get an idea of how likely a prospective borrower is to default, so they can decide what interest rate to offer, or to offer a credit or loan product at all.

Let’s start with the first C – Character. For Character, lenders are looking at your reputation and track record for repaying debts. They generally do this by looking at your credit reports and credit scores. All other factors equal, the better your credit score, and the fewer potential negative items on your credit report, the more likely you’ll be approved for a loan or credit item, and the more likely you’ll be eligible for lower interest rates. In fact, certain lenders, particularly those in the housing market, may have specific minimum credit scores needed to be eligible for their loans. We’ve talked at length about credit reports and credit scores on this site, so instead of rehashing all of those items, you can find the links to our previous posts and videos below (1, 2, 3, 4).

The next C is Capacity. Capacity measures your ability to repay a loan by looking at your income and comparing it to your installment debt. This is done chiefly by assessing your debt-to-income ratio. Your debt-to-income ratio is your total monthly debt payments divided by your gross monthly income. For instance, if you make $60,000 a year, your monthly gross income is $5000. If your car payment in $400, your personal loan payment is $300 and your mortgage payment is $1300, your total monthly debt payment would be $2000. Your debt-to-income ratio would therefore be $2000/$5000, or 40%. Generally speaking, the lower your debt-to-income ratio, the better your chances for qualifying for a loan, and certain lenders, especially in the housing market, have maximum debt-to-income ratios for a potential borrower to be eligible.

Next week we’ll return with the other three Cs of Credit!

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Dealing with Incivility and Unprofessional Behavior Regarding Diversity

We’ve likely all heard friends, family, colleagues and others make disparaging comments and jokes about marginalized groups and those that are common targets of discrimination. What should you do? Below we’ll discuss a scenario and four possible actions.

You overhear Robert, a male co-worker, telling a joke about Rednecks. Yesterday you heard him make a joke about people of color and last week you heard him telling a joke about obese women. You know he is trying to be funny, but you find the jokes offensive. While you want the behavior to stop, you work in the same unit and you don’t want to make any enemies.

Option #1 – The say nothing response

You don’t say anything due to concerns he will turn people against you or start telling jokes at your expense. You may also be concerned about your job security if he’s your supervisor or has a higher position in the organization than you. Unfortunately, silence is the same as condoning the behavior. By not saying or doing anything to address racist/sexist jokes, you help perpetuate the problem. In most scenarios, this is the least helpful option.

Option #2 – The one-on-one response

You ask to have a word alone with Robert and let him know his jokes make you feel uncomfortable and you think the office should be a space where everyone can feel at ease. Talking to the person directly is generally a good strategy, but if you feel unsafe or fear retaliation, consider other options.

Option #3 – The organizational response

You tell your supervisor (or if he’s at a higher position than you, his supervisor) about the situation. This is a good option, especially if you don’t think Robert will respond well to one-on-one discussion. The supervisor can help address inappropriate workplace behavior and issue a warning. However, while Robert might change his behavior, he may not learn anything or gain any new insight from a purely disciplinary approach.

Option #4 – The institutional response

Talk to someone in HR. This can also be a good option if you don’t think one-on-one discussion will work. Also, speaking to an outside third party can inform you about your options and any relevant policies that may help you make an informed decision about how to best approach the situation.

Not all options will be helpful or feasible given each individual situation; however, if you’re committed to creating a diverse and inclusive environment and want it to be clear that these sorts of jokes and comments are not condoned, it’s important to respond. Remember, silence is the same as condoning the behavior!