Finance & Career
When looking at your 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 your likelihood of repaying a loan, also known as creditworthiness. A better understanding of what makes up your creditworthiness is the first step in improving and maintaining your credit.
The Five Cs of Credit
- Conditions are the terms of the loan that the lender must consider before lending you money. Conditions include current interest rates, the loan amount you are seeking, and the value of the asset you may be purchasing.
- Character is your reputation or track record for repaying your debt, your credit history. Credit history makes up 35% of your credit score.
- Capital is the cash that you have to put towards an investment. The amount of capital you put towards an item shows your level of seriousness. The larger the capital investment, the more likely you are to secure a line of credit.
- Collateral is different from capital. Collateral is the asset used to secure the loan. The automobile itself is the collateral that secures an auto loan. Similarly, the house you are buying secures the mortgage. The bank can keep collateral if you fail to pay off a loan.
- Capacity is your ability to repay a loan. To figure out your capacity, a lender will calculate your debt-to-income ratio.
Knowing the five Cs of credit will help you to
- plan for future purchases, investments and savings.
- read and understand your credit report.
- understand how and why you were approved or denied for credit.
- learn how to improve your creditworthiness and score.
Watch the video 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…
- CONDITIONS – Variables like interest rates and loan amount.
- 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.
- 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.