The 5 Cs of credit and why they're important

Sometimes, a high credit score isn't enough.

Key takeaways:

  • Loan officers and underwriters look at both your credit report and your credit score; they also consider these 5 factors.
  • Additional considerations such as character, your ability to repay the loan, your down payment, collateral tied to the loan, and what you’ll use the loan for are also important.
  • When you understand what lenders look for, you can present yourself and your loan application as positively as possible.


Regardless of whether it’s for a home, a car, your business, or something else, applying for a loan can be a stressful process. Good credit gives you a strong foundation for borrowing money, but your credit report and score are not a lender’s only considerations. When deciding whether to loan you money, most lenders base their decision on your credit as well as several other factors, called the 5 C’s of Credit.

When you understand what lenders look for, you can present yourself as positively as possible.


1. Character

Character is an assessment of your ability to pay your bills. A loan officer will start by considering your credit reports from Experian, TransUnion, and Equifax, but they look at more than just your credit report and score. They may consider your work experience and job history. A credit union might even look at the interactions they have had with you as a member.


2. Capacity

Lenders want to make sure you’re looking at the right loan for your situation, so they consider your ability to repay the loan, called Capacity. This evaluation is based on a comparison of your income and your expenses, also known as your debt-to-income ratio—in other words, how much you owe compared with how much you make. They also look at things like how long you’ve been at your job and other factors which indicate you have a stable financial situation that will allow you to continue making payments over the life of the loan.


3. Capital

Lenders want to know that you’re serious about the loan and your goals for using the money, so they like to see you participate. Capital is the amount of your own money that you are willing to spend toward the goal. When you contribute your own money (like putting a down payment on a home or vehicle), it typically decreases the chances that you’ll default on the loan. It lets the lender know you are committed to the purchase by risking your own money as well as theirs.


4. Collateral

Collateral is an asset that you offer to secure the loan. If you get to a point where you can’t make your payments anymore, the lender may take your collateral by repossessing it. For example, the collateral for your car loan is typically the car itself, the collateral for your mortgage will be the house, and the collateral for a business loan may be equipment or buildings. When the value of your collateral exceeds the amount of your loan, your loan application is more likely to be viewed positively.


5. Conditions

Lenders want to know what you will be using the loan for, and what could impact your ability to make the scheduled payments. These Conditions may help determine whether your loan application is approved; they may also dictate the details of your loan such as the interest rate and term. 


Did You Know?

Loan officers and underwriters look at both your credit report and your credit score, so it is important that the information shown be accurate. Use to check your information; it’s the only authorized website that allows you to get a free credit report every 12 months from each of the three major credit bureaus—Equifax, Experian, and TransUnion. Review each of the credit reports carefully to make sure there are no errors or outdated information. If you find something that’s incorrect, take the time to contact each credit bureau to correct the error.


Find the right fit

When applying for a loan, it’s helpful to understand what a lender is looking for. Each lender is different. Depending on the type of loan you are seeking, some C’s may be more important than others, but the lender will likely consider each of them on some level before approving your loan. The goal is to make sure that the loan is the right fit—for you and the lender.

Need a loan?

Lenders don’t all look at the 5 Cs of credit in the same way, but they do consider these factors when they make their loan decisions. Business relationships still count; it pays to establish a long-term relationship with a credit union like Global that puts people before profit.

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