The five C's 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. But what are these five C's? The five C's of credit are character, capacity, capital, collateral, and conditions.
Understanding the 5 C's of Credit
The first C is character—the applicant's credit history.
The second C is capacity—the applicant's debt-to-income ratio.
The third C is capital—the amount of money an applicant has.
The fourth C is collateral—an asset that can back or act as security for the loan.
The fifth C is conditions—the purpose of the loan, the amount involved, and prevailing interest rates.
Each lender has its own method for analyzing a borrower's creditworthiness but the use of the five C's—character, capacity, capital, collateral, and conditions—is common for both individual and business credit applications.