Mastering the 4 C’s of Finance: A Beginner’s Guide to Financial Confidence
By Zunzeiry Melende
Finance is such a broad topic, but simply because there is more than one staple that makes up finance as a whole. Many of us begin to learn the definition of finance, as soon as we understand how to complete a simple math equation, that way we can get a head start. But, there is a highly simplified way to understand finance, especially if you are just starting out, building up a financial history, or learning on your own for the first time. Have you heard of the 4 C’s? The 4 C’s will introduce you to a guide that allows you to stand on your own two feet, without the stress and the fear of feeling like you’re doing something incorrect or wrong. Come alongside me to learn what the 5 C’s are.
The 4 C's are known as Character, Capacity, Capital, and Collateral. Let us begin with Character, with meaning any credit history or what debt you have managed in the past. Your character is your history, lenders look at this when you decide to open a new account, or any type of loan. With that being said, lenders will also look at payment history, and how much you have borrowed, with this being your “character.” So you may be able to trick them with your charm, or have the biggest smile on your face, but make sure you're coming in with a good history of credit behind you.
The second C is Capacity, this refers to the ability you have that will repay loans. As you can see the C’s are getting stronger by the second, payment history is important, but are you capable of paying things back? Lenders often look at your capacity in a way to see how much debt you may have, and compare to the income you achieve monthly or yearly. Not to get too technical (just kidding), but this relies heavily on “DTI,” which is known as the Debt to Income Ratio. To use this, you can add up your monthly debt payment, then divide that number by your pre-taxed income, and then multiply that new number by ten. Sounds complicated doesn't it, but this is what we call “hands on experiences.” Lower DTI means less sick, higher DTI means higher risk, so make sure you're keeping an eye out on your monthly payments especially.
Next on our list is Capital, and not the capital of a city or country, but more so the capital is your savings, your investments, and assets. Many of this is being looked after, to see whether or not the assets are being set towards a loan. This could be towards a car or a home, but this is not harmful, it can be information researched to see if you’re consistent. If we’re looking to find out something that can be beneficial in your favor, it is the capital. But no need to worry, keep in mind, that if something occurs and it occurred not by you, your capital provides you with additional security.
When we hear the word collateral, we often think of something negative, as in collateral damage. In the financial system, it can often mean something similar. Collateral is gathered to be provided as security, specifically for anything “secured,” such as a secured loan or a secured credit card. This is used as somewhat of a shield, used to protect you against evil that tries to enter. That does sound quite dramatic, but we are talking about spams, phony phone calls, and hackers, we are not looking to make space for them. Using collateral can be taken if a payment has yet to be finalized, but collateral is not the same form of payment for all. For example, cars can be used as collateral, and a cash deposit to possibly open a bank account can also be collateral. Collateral is less risky, but can be useful for building credit.
Now that we have learned the 4 C’s, do we think we can take them alongside us into our everyday lives? No one expects you to know 4 C’s automatically, you have to learn and experience each C in order to understand it physically. Each C is a representation of a responsibility you just take care of, but that does not mean it must control your life. Learning beforehand and taking time to research does not have to be negative or harmful, it can be a valuable learning process that you achieve at your own pace. Allow the 4 C’s to follow you around as a friend, not as an enemy.