The 4 Cs of Credit Health And Why Are They Important?


The 4 Cs of Credit Health

Just like you need to be physically healthy, you must have good credit health too. The same applies to businesses as well. So, what is credit health and why is it so important? Credit health is a significant indicator of the overall financial well-being of an individual or a business. Whether you are an individual or a corporate looking for a loan, overall credit health is crucial in getting your loan sanctioned or rejected. This post focuses on the 4 Cs of credit health and their importance.

  1. Character

You may wonder what has character got anything to do with the credit health but think again! There is a strong link between the two. Character, in this case, is not a certificate given by someone you know but is revealed by the credit history. Lenders look at the repayment history, all running loans and credit cards before they sanction a loan. Doing a credit score check from time to time lets a business assess their overall credit position and also if any CIBIL score improvement is required to get a loan sanctioned.

      2. Capacity

The next “C” is the capacity to repay what a business borrows. The credit score reveals the repayment history; however, lenders also want to know if the company can repay the loan dues in future too.
To assess the repayment capacity, the lenders will go through various financial documents. For a business, it will be the expected cash flows and for an individual, it will be their expected monthly salary. Lenders will also consider the overall debt situation to assess the repayment capacity. Outstanding debt is one of the crucial CIBIL score affecting factors and also impacts the ability to borrow further and repay future loan dues.

      3. Collateral

Collateral is any asset that you as an individual or business borrower pledges to get a loan. Collateral acts as a backup for the lender in case the borrower defaults on their payment. In some loans like a home loan or an auto loan, the underlying asset (home or the auto) already acts as collateral. Deposits, equity, bonds jewellery, etc can be used as collateral.

For someone with a low credit score who does not have the time to wait for a CIBIL score improvement, taking a loan against an asset can help the access funds rather than wait for a loan sanction.

     4. Conditions

The macro conditions, as well as the micro conditions, influence the lender’s decision to sanction a loan for a business. When you take a loan for a home or a car, the end-use is clear, so there is less ambiguity there. However, when it comes to a business loan, the lender wants to ensure that they lend it to a viable business. The lenders assess the business plans, overall economic conditions, the competition and the customer base before they sanction a loan.

     5. Why are the 4 Cs of Credit Important

The four Cs of credit are important due to the following reasons:

Good credit health allows businesses and individuals to access credit. Companies may require loans for various purposes like day-to-day operation, expansion and sometimes due to an exigency.
Good credit health also allows businesses to get credit at favourable terms. A lender would be more willing to lend to an organisation that has a favourable combination of the 4Cs. Companies should try to focus on how to increase the CIBIL score if they do not have a healthy credit report before they apply for a loan to improve their chances of getting a loan sanctioned.

How to take control of the 4 Cs of Credit Health?

Above we discussed the significance of the 4 Cs, now it’s time to focus on how you can take control of the 4Cs of credit health.

Repaying the loan dues on time keeps your credit report clean and also shows character. Amongst the five CIBIL score affecting factors, repayment history has the maximum weightage.
Borrow after a careful analysis so that you do not end up borrowing more than you actually need. This increases the interest cost and also reduces the capacity to borrow further.
Do a credit score check from time to time so that in case there is a problem in the report or if the score is low, you can work on it. If you want to know how to increase the CIBIL score, you can get more details at Credit Triangle.

To sum it up

The 4 Cs of credit health apart from being indicators of financial robustness also allow you to access credit and fulfil your dreams or manage some day-to-day functions or challenges. Maintaining good credit health is not desired but necessary in the times we live in.