Finance & Career
When someone is looking at their credit history and credit score, it is important to know the five Cs of credit, character, capital, collateral, conditions, and capacity. The five Cs are the factors used to assess a person’s likelihood of repaying a loan, also known as creditworthiness. A better understanding of what determines a person’s creditworthiness is the first step in improving and maintaining credit.
The Five Cs of Credit
- Character is a person’s reputation or track record for repaying debt also known as their credit history. Credit history makes up 35 percent of a credit score.
- Capital is the cash someone has to put toward an investment. The amount of capital a person puts toward an item shows their level of seriousness. The larger the capital investment, the more likely they are to secure a line of credit.
- Collateral is different from capital. Collateral is the asset used to secure a loan. The automobile itself is the collateral that secures an auto loan, while a house secures a mortgage. The bank can keep collateral if a person fails to pay off a loan.
- Conditions are the terms of a loan that the lender must consider before lending the money. Conditions include current interest rates, the loan amount a person is seeking, and the value of the asset the person may be purchasing.
- Capacity is a person’s ability to repay a loan. To figure out someone’s capacity, a lender will calculate their debt-to-income ratio.
Knowing the five Cs of credit will help people
- plan for future purchases, investments and savings
- read and understand credit reports
- understand how and why they were approved or denied for credit
- learn how to improve their creditworthiness and score.
Watch the video below for a review of the five Cs of credit.
Content below reflects the text in graphics of the video.
- The five Cs of credit are…
- CHARACTER – Your credit history or track record for repaying your debt.
- CAPITAL – The cash you have to put towards the investment.
- COLLATERAL – The asset used to secure the loan.
- CONDITIONS – Variables like interest rates and loan amount.
- CAPACITY – Your ability to repay a loan or debt-to-income ratio.
- Understanding the five Cs of credit can help you plan for future purchases, investments and savings.