Consumer Credit
Capacity
For an individual, the capacity to repay a loan is evaluated with their debt ratio. Banks and other financial institutions calculate the debt ratio by taking 3% to 5% of the revolving credit (credit card and line of credit) and adding the monthly regular payments such as cars, rent, mortgage, etc.
They divide the total payments by the monthly gross salary, which gives you a percentage. Normally, a debt ratio greater then 50% is considered dangerous. Job stability is also an important aspect because it secures a regular income. The longer you’ve been having the same job, the less are the probability to lose it, which makes the candidates less risky.
Calculate your debt ratio (example):
Gross monthly income: 4000$
Total balance on revolving credit: 1000$
Total regular monthly payments: 2000$
((1000$*0.05) + 2000$) / 4000$ = 51.25%
| 0 - 5%: | Excellent |
| 6% - 15%: | Very Good |
| 16% - 25%: | Good |
| 26% - 35%: | Average |
| 36% - 50%: | High |
| 51% and higher: | Very High |
Try our calculator What is Your Debt Ratio?
Goodwill
To evaluate the goodwill of a candidate to repay a loan, the individual is evaluated on his passed payments with other lenders, which are showed on the credit bureau. The credit report gathers credit history since the opening of the individual’s credit. We can see his credit experience on credit cards, loans, cars, mortgages and other bills such as the cell phone bill.
Also, it shows bad credit such as late payments, write-offs (known as R9), collections, vehicle repossession (known as R8), judgments and bankruptcies. Credit scores like the Beacon gather all the information and give you a score between 300 and 850. Under 620 is consider as subprime, 620 to 700 as average, 700 to 750 as good and 750 and up as excellent. Try our questionnaire to evaluate your own credit score!
Here is what affects the credit score:
- Numbers of inquiries
- % used on revolving credit
- Late payments
- Payment history
- Time at credit bureau
