what are the 5 cs of credit 
the five cs of credit is a system used by lenders to gauge the creditworthiness of potential borrowers the system weighs five characteristics of the borrower and conditions of the loan attempting to estimate the chance of default and consequently the risk of a financial loss for the lender the five cs of credit are character capacity capital collateral and conditions joules garcia investopediaunderstanding the 5 cs of creditthe five cs of credit method of evaluating a borrower incorporates both qualitative and quantitative measures lenders may look at a borrower s credit reports credit scores income statements and other documents relevant to the borrower s financial situation they also consider information about the loan itself each lender has its own method for analyzing a borrower s creditworthiness most lenders use the five cs character capacity capital collateral and conditions when analyzing individual or business credit applications alison czinkota investopedia1 charactercharacter the first c more specifically refers to credit history which is a borrower s reputation or track record for repaying debts this information appears on the borrower s credit reports which are generated by the three major credit bureaus equifax experian and transunion credit reports contain detailed information about how much an applicant has borrowed in the past and whether they have repaid loans on time these reports also contain information on collection accounts and bankruptcies and they retain most information for seven to 10 years information from these reports helps lenders evaluate the borrower s credit risk 1 for example fico uses the information found on a consumer s credit report to create a credit score a tool that lenders use for a quick snapshot of creditworthiness before looking at credit reports fico scores range from 300 to 850 and are designed to help lenders predict the likelihood that an applicant will repay a loan on time 2 other firms such as vantagescore a scoring system created by a collaboration of equifax experian and transunion also provide information to lenders 3many lenders have a minimum credit score requirement before an applicant is approved for a new loan minimum credit score requirements generally vary from lender to lender and from one loan product to the next the general rule is the higher a borrower s credit score the higher the likelihood of being approved lenders also regularly rely on credit scores to set the rates and terms of loans the result is often more attractive loan offers for borrowers who have good to excellent credit given how crucial a good credit score and credit reports are to secure a loan it s worth considering one of the best credit monitoring services to ensure that this information stays safe prospective borrowers should ensure that credit history is correct and accurate on their credit report adverse incorrect discrepancies can be detrimental to your credit history and credit score consider implementing automatic payments on recurring billings to ensure future obligations are paid on time paying monthly recurring debts and building a history of on time payments help to build your credit score 2 capacitycapacity measures the borrower s ability to repay a loan by comparing income against recurring debts and assessing the borrower s debt to income dti ratio lenders calculate dti by adding a borrower s total monthly debt payments and dividing that by the borrower s gross monthly income the lower an applicant s dti the better the chance of qualifying for a new loan 4every lender is different but many mortgage lenders prefer an applicant s dti to be around 36 or less before approving an application for new financing it is worth noting that sometimes lenders are prohibited from issuing loans to consumers with higher dtis as well for example qualifying for a new mortgage typically requires a borrower have a dti of 43 or lower to ensure that the borrower can comfortably afford the monthly payments for the new loan according to the consumer financial protection bureau cfpb 5you can improve your capacity by increasing your salary or wages or decreasing debt a lender will likely want to see a history of stable income although switching jobs may result in higher pay the lender may want to ensure that your job security is stable and that your pay will continue to be consistent lenders may consider incorporating freelance gig or other supplemental income however income must often be stable and recurring for maximum consideration and benefit securing more stable income streams may improve your capacity regarding debt paying down balances will continue to improve your capacity refinancing debt to lower interest rates or lower monthly payments may temporarily alleviate pressure on your debt to income metrics though these new loans may cost more in the long run be mindful that lenders may often be more interested in monthly payment obligations than in full debt balances so paying off an entire loan and eliminating that monthly obligation will improve your capacity lenders may also review a lien and judgments report such as lexisnexis riskview to further assess a borrower s risk before they issue a new loan approval 63 capitallenders also consider any capital that the borrower puts toward a potential investment a large capital contribution by the borrower decreases the chance of default borrowers who can put a down payment on a home for example typically find it easier to receive a mortgage even special mortgages designed to make homeownership accessible to more people for instance loans guaranteed by the federal housing administration fha may require a down payment of 3 5 or higher and nearly 90 of all department of veterans affairs va backed home loans are made without a down payment 78 capital contributions indicate the borrower s level of investment which can make lenders more comfortable about extending credit down payment size can also affect the rates and terms of a borrower s loan generally larger down payments or larger capital contributions result in better rates and terms with mortgage loans for example a down payment of 20 or more should help a borrower avoid the requirement to purchase additional private mortgage insurance pmi 9capital is often obtained over time and it might take a bit more patience to build up a larger down payment on a major purchase depending on your purchasing time line you may want to ensure that your down payment savings are yielding growth such as through investments some investors with a long investment horizon may consider placing their capital in index funds or exchange traded funds etfs for potential growth at the risk of loss of capital another consideration is the timing of the major purchase it may be more advantageous to move forward with a major purchase with a lower down payment as opposed to waiting to build capital in many situations the value of the asset may appreciate such as housing prices on the rise in these cases it would be less beneficial to spend time building capital 4 collateralcollateral can help a borrower secure loans it gives the lender the assurance that if the borrower defaults on the loan the lender can get something back by repossessing the collateral the collateral is often the object for which one is borrowing the money auto loans for instance are secured by cars and mortgages are secured by homes for this reason collateral backed loans are sometimes referred to as secured loans or secured debt they are generally considered to be less risky for lenders to issue as a result loans that are secured by some form of collateral are commonly offered with lower interest rates and better terms compared to other unsecured forms of financing you may improve your collateral by simply entering into a specific type of loan agreement a lender will often place a lien on specific types of assets to ensure that they have the right to recover losses in the event of your default this collateral agreement may be a requirement for your loan some other types of loans may require external collateral for example private personal loans may require placing your car as collateral for these types of loans ensure you have assets that you can post and remember that the bank is only entitled to these assets if you default 5 conditionsin addition to examining income lenders look at the general conditions relating to the loan this may include the length of time that an applicant has been employed at their current job how their industry is performing and future job stability the conditions of the loan such as the interest rate and the amount of principal influence the lender s desire to finance the borrower conditions can refer to how a borrower intends to use the money business loans that may provide future cash flow may have better conditions than a house renovation during a slumping housing environment in which the borrower has no intention of selling additionally lenders may consider conditions outside of the borrower s control such as the state of the economy industry trends or pending legislative changes for companies trying to secure a loan these uncontrollable conditions may be the prospects of key suppliers or customer financial security in the coming years some consider the criteria that lenders use as the four cs because conditions may be the same from one debtor to the next it is sometimes excluded to emphasize the criteria most in control of a debtor conditions are the least likely of the five cs to be controllable many conditions such as macroeconomic global political or broad financial circumstances may not pertain specifically to a borrower instead they may be conditions that all borrowers may face a borrower may be able to control some conditions ensure that you have a strong solid reason for incurring debt and be able to show how your current financial position supports it businesses for example may need to demonstrate strong prospects and healthy financial projections 