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What Are the 5 Cs of Credit?

What Are the 5 Cs of Credit?
Jason Steele
Jason SteeleUpdated May 25, 2023
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To determine a borrower’s creditworthiness, most lenders use the 5 Cs of credit. This helps them decide whether or not to approve you for a credit card or loan.What are the 5 Cs of credit? They are: Character, capacity, capital, collateral, and conditions. Learn more about each one, how they work, and how they might help you borrow money when you need to.

What Is Credit?

Your credit is your ability to manage and pay back money you’ve borrowed. Lenders look at your credit report when deciding whether to loan you money. Your credit report includes your credit score and your credit history. As mentioned, there are 5 Cs of credit: character, capacity, capital, collateral, and conditions. Knowing and understanding these criteria can help you improve your creditworthiness and potentially help you qualify for a loan.


When it comes to credit, “character” means your credit history. Credit history is how you’ve managed debt in the past, and it includes every credit card or loan you’ve ever taken out. Lenders report the history of each of your credit accounts to the credit bureaus. This information is included in your credit report and it’s used to calculate your credit score. Credit scores are important because they help determine if you’ll be approved for a credit card or a loan, and at what interest rate. In general, the higher your credit score, the lower the personal loan interest rates or credit card interest rates you may qualify for. To check your credit score, start with your bank or credit card company. Many of them now offer free credit scores for their customers. You can also check your score with one of the three credit bureaus.Credit scores are based on a variety of factors, including payment history, the types of credit you have, the length of your credit history, and your debt. To build an average credit score, there are a few things you can do. First, always pay your bills on time. Your payment history accounts for about 35% of your credit score, so several late payments could cause your credit score to drop. Also, try to keep your oldest line of credit open, which will increase the length of your credit history. A longer credit history may help you achieve a good credit score.Finally, keep your debt as low as you can. Having too much existing debt can cause your credit score to decrease, and even potentially lead to a bad credit score


This is your capacity to repay loans. Lenders figure out your capacity by comparing your debt to your income. This is known as your debt-to-income ratio (DTI). Your DTI can be calculated by adding up all your monthly payments and dividing that amount by your gross monthly income, and then multiplying the resulting number by 100. A low debt-to-income ratio usually means less risk for the lender. Ideally, lenders look for a DTI that’s below 36%.To improve your capacity, you can either increase your income or decrease your debt. For instance, you might ask for a raise at work, apply for a better-paying job, or get a side hustle to boost your income. Paying off your existing loans, such as a car loan or student loans, will help reduce your debt. 


Capital refers to savings, investments, or assets you’re putting toward your loan. This could be the down payment on a car or house. Typically, the higher the down payment you make, the lower the interest rate you might get. Capital helps a lender feel more confident about your ability to repay the loan. One way to improve your capital is to save more money. For example, dedicate a certain portion of each paycheck to savings and/or investments. 


Collateral is an asset used to back a loan; it acts as extra security for the lender. If you don’t repay the loan or credit card, the lender or bank can take possession of your collateral to help recoup their losses. Not every type of loan or credit card requires collateral, but some, like secured loans and secured credit cards, do. The kind of collateral you put up depends on the type of credit you’re applying for. If you’re buying a house or car, the home or the vehicle are the collateral. If you’re applying for a secured credit card, you may have to give a cash deposit as collateral. 


This means additional information that may be relevant to your credit application — both personally and in a broader sense. “Conditions” might include such things as current federal interest rates, the health of the economy, and how you plan to use the moneyOf these conditions, the only one you may be able to control is your intended purpose for the loan. A lender might be more willing to lend you funds for a specific stated reason, such as personal loans for home improvements that could add to the value of your house, rather than a purpose that’s vague or undefined.

The Takeaway

The 5 Cs of credit are criteria that help lenders determine the creditworthiness of potential borrowers. The 5 Cs influence whether or not a lender approves you for a loan or credit, the amount they’re willing to lend you, and the interest rate and terms they offer. Knowing about the 5 Cs of credit and how to improve them could increase your chances of qualifying for a loan.If your 5 Cs are in good standing and you’re ready to apply for a personal loan, Lantern can help simplify the process. All you have to do is fill out one application, and you’ll get offers from multiple lenders in our network. That makes it easy to compare rates and terms to find the best option for your needs.Compare rates and terms with Lantern. It takes just minutes!

Frequently Asked Questions

What is the most important C of credit?
Can I get a loan if I don't have collateral?
How can I improve my Capital when applying for a loan?
What are the 5 Cs of credit?
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About the Author

Jason Steele

Jason Steele

Jason Steele has been writing about credit cards and award travel since 2008. One of the nation's leading experts in this field, he has contributed to dozens of personal finance and travel outlets and has been widely quoted in the mainstream media.
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