Smiling couple stares at the phone in the man’s hand while the woman holds a credit card.

What Are the 5 Cs of Credit?

Published July 14, 2023
4 min read

Table of contents

Key points about: the 5 Cs of credit

  1. Lenders typically use five metrics to determine a potential borrower’s creditworthiness: capacity, capital, character, collateral, and conditions.

  2. Capacity and capital have to do with your income and how much money you have; collateral refers to what you can put down against the loan.

  3. Character refers to past financial behavior, while conditions are the circumstances surrounding your loan.

A lending institution’s decision-making process may seem like a mystery when you apply for a credit card or another type of loan. However, it doesn’t have to be. Lenders use a variety of metrics to determine if you’re eligible. While specific requirements vary among different lenders, they usually fall under one of five categories called the 5 Cs of credit. The Vermont Financial Literacy Working Group, a group of State Government leaders, identifies the 5 Cs of credit as capacity, capital, character, collateral, or conditions. Read on to learn more about each of the 5 Cs, along with tips that could help improve your chances of credit approval.

Why are the 5 Cs important?

The 5 Cs of credit offer a look into how lenders and credit card issuers decide whether to extend credit to a potential borrower. If you’re considering applying for a new credit card, reviewing the 5 Cs to see how you compare to other applicants may be helpful. While each financial institution may have different priorities, understanding these factors can help you improve your creditworthiness.

Capacity

“Capacity” refers to your financial ability to repay your credit card balances or other types of debts. Your debt-to-income ratio (DTI) determines your capacity. The Consumer Financial Protection Bureau explains that your DTI equals your total monthly debt divided by your gross monthly income, expressed as a percentage. If your monthly bills come out to $1800 and you make $6000 a month, your DTI is around 30%, for example. Credit card issuers may only lend to applicants with a specific DTI or lower, depending on the lender and the card. Usually, the lower your DTI, the better your chances.  

To improve your capacity and your likelihood of qualifying for a loan or credit card, you could work to reduce your DTI. Capacity primarily focuses on your finances on a monthly scale. Paying off your debts or paying them down enough to reduce monthly payments could improve your overall DTI. Increasing your monthly income would have a similar effect.

Character

Your “character” refers to your credibility based on your past behaviors. Lenders examine your previous financial habits to predict how you might handle debt in the future. Credit history accounts for a significant portion of your character to credit card issuers. The easiest way to assess your credit history is by looking at your credit report, which you can access for free at AnnualCreditReport.com. Your credit reports show information on your credit accounts, loans, and bankruptcies from the last seven to ten years, including repayment, overall debt, and credit utilization ratio

In addition to your credit history, lenders look at other factors to get a sense of your “character.” They may consider the total amount of credit card debt you’ve accrued and additional loans you’ve taken out. Your employment background may even influence your character. A stable work history likely instills more confidence than a history of job-hopping or gaps between positions. If you’ve demonstrated consistent financial responsibility, your character should look good to credit card issuers. The steps that improve your credit score also strengthen your character: paying bills on time and reducing your credit utilization ratio. If you are unable to repay your entire balance, make at least the minimum payment required each month.

Capital

“Capital” refers to the total amount of money you could invest in a loan as soon as you’re approved. For mortgages, capital usually refers to the down payment. Bigger down payments could demonstrate more financial security. They also typically result in smaller monthly payments, which are easier to repay.

Some loans don’t require a down payment, like most credit cards. However, saving up in advance could improve your capital if you’re considering a major purchase like a car or a house. For a hands-off method, keep your down-payment savings in an account that earns interest.

Collateral

“Collateral” refers to an asset or deposit you can put down against a loan to provide lenders with extra security. If you can’t repay the loan, the lender can seize whatever you put up as collateral. Some secured loans may require specific assets, like your vehicle or house, as collateral. However, credit card collateral is usually a refundable security deposit on a secured credit card.

If you plan on applying for a secured credit card, you could improve your collateral by saving up to make a bigger deposit. That way, you may qualify for a higher credit limit.

Did you know?

Collateral only applies to secured loans and secured credit cards, so you can’t put up collateral for an unsecured credit card. The collateral you put up for a secured credit card is in the form of the security deposit, which is equal to your credit limit on the card. With the Discover It® Secured Credit Card, you can upgrade to an unsecured card after six consecutive on-time payments and six months of good status on all your credit accounts.1

See if you’re pre-approved

Conditions

“Conditions” refer to factors outside your control that may affect your ability to repay a loan or credit card. Those circumstances can include aspects of your professional life, like the years you’ve been at your job or your industry’s performance, according to the U.S. Small Business Administration. The Vermont Financial Literacy Working Group reports that lenders also assess your credit card or loan’s unique terms, like interest rate, to determine whether it’s an appropriate fit for you. On a broader scale, the country’s overall economic health and future predictions play a role in determining your eligibility for a credit card. Each of these conditions interacts with each other, making this a complex factor to navigate. 

You can’t control most of the external conditions that influence your eligibility for a credit card. However, applying for a credit card that aligns with your circumstances and needs can improve your approval odds. Choosing the best time to apply could also help you manage conditions. If your industry has recently undergone a boom or the economy has steadily improved, that could be an opportunity for you to apply. 

Whether you’ve recently been denied for a credit card or have just begun searching for one, it helps to have some insight into lenders’ perspectives. Knowing the 5 Cs of credit means understanding the factors that decide your eligibility. That can allow you to make smarter financial decisions. To improve your chances of qualifying for a new credit card or getting the best loan terms, be mindful of the 5 Cs.

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