The 5 C's of Credit

The 5 C's of Credit

Have you ever heard of the 5 C’s of credit? They are Character, Capacity, Capital, Collateral and Conditions

Your lender uses these to help determine your creditworthiness when applying for a loan, and assess the level of risk associated with lending you money. These five factors can determine whether you’re approved for a loan product, and also set your loan rates and terms. Understanding them can help put you in a better position to get the financing you need. 

Let’s take a closer look at each of the 5 C’s:


Character is your overall creditworthiness, or credit history. You want to be able to show your lender that you are responsible and make on-time payments. To evaluate this, your lender will look at your credit report, which is generated by the three major credit bureaus (Equifax, Experian and TransUnion). Your credit report shows your payment history, as well as information on collection accounts and bankruptcies. Make sure that your credit history is accurately reflected on your credit report. Companies like FICO® utilize your credit report to calculate your credit score, which has an impact on your loan’s interest rate and terms. The better your credit score, the better the rate and terms. Lenders often have a minimum credit score requirement for each loan product. 


Capacity is your ability to repay loans. This can be evaluated through your debt-to-income (DTI) ratio, or how much debt you have in relation to your cash flow. Your lender wants to know you can afford a new loan payment on top of your existing debts. Your DTI is calculated by adding your total monthly debt payments and dividing that by your gross monthly income. The lower your DTI, the more likely you are to qualify for a loan. Minimum DTI requirements vary by lender. 


Capital is made up of your savings, investments or other assets that could help with debt repayment. It represents your level of commitment and seriousness by showing you’re willing to contribute some of your own funds. The size of your down payment on your home can be viewed as capital and impact your loan’s terms and rates. 


Collateral is something that could be provided as protection to your lender if you default on payments. Your home itself can serve as collateral for your home’s mortgage. For example, if you default on your home loan, then your lender can sell your home to get their money back. Collateral provides your lender with additional security.


Conditions are the overall health of the economy and industry trends. For example, the investing environment, pending legislative changes, and market conditions. Conditions could also include how you plan to use the money you receive. You may not always have control over the conditions. However, being aware of how they can impact you will give you a better understanding of your odds of qualifying. 

In conclusion, one “C” is not greater than the other, and the strength in one can offset weakness in another. Working to address the five C’s before applying for a loan can better your chances of approval!

Advertised mortgage company is a mortgage lender and not a financial advisor, credit repair or consumer credit counseling company. We do not provide investment, tax or legal advice, or directly provide services or assistance repairing, modifying, improving or correcting credit.