The 5 C's of Credit

What Lenders Look For:

When you apply for a loan a lender will assess your credit risk based on a number of factors including your credit history, income, and overall financial situation. The five C's are an additional list of five different things a lender will consider and assess when deciding whether or not they will allow you credit.

1. Credit History

Credit history is one of the major components that lenders will look into when deciding whether or not you qualify for credit. It is basically the track record you have established through making payments and managing credit over time. Your credit report is a detailed list of your credit history, which includes the information provided by previous lenders. It's important to keep up with any payments, and pay everything on time in order to keep a good credit history.

2. Capacity

Lenders will look into whether or not you will be able to comfortably manage your payments. Good indicators of this would be your employment history, income amount, stability, and type of income.

3. Collateral

Loans, lines of credit, or credit cards you apply for may be secured or unsecured. With a secured product, such as an auto or home equity loan, you pledge something you own as collateral. The value of your collateral will be evaluated.

4. Capital

Although your household income is expected to be the primary source of repayment, your capital represents the savings, investments, and other assets that can help repay a loan. This would be useful for a person who might have just lost their job and wants to receive credit.

5. Conditions

When you are trying to receive credit, lenders may want to know how you plan to use the money and will consider the loan’s purpose, such as whether the loan will be used to purchase a vehicle. Other factors, such as environmental and economic conditions, may also be considered.