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What Are the 5 Cs of Credit?

Last Updated: June 28, 2024

5 min read

Table of contents

Key Points:

Lenders typically use five metrics to determine a potential borrower’s creditworthiness: capacity, capital, character, collateral, and conditions.
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. Character refers to past financial behavior, while conditions are the circumstances surrounding your loan.
Cultivating your own 5 Cs can help you qualify for a new credit card or get the best loan terms.

A lending institution’s decision-making process may seem like a mystery when you apply for a credit card or another type of personal loan. But lenders use a variety of metrics to determine if you’re eligible for credit, including the "5 Cs of Credit." These include:

Capacity
Capital
Character
Collateral
Conditions

If you’re looking for tips that could help improve your chances of credit approval, read on to learn more about each of the 5 Cs of credit.

Why are the 5 Cs important?

As mentioned above, the 5 Cs of credit factor into how a financial institution or credit card issuer might decide whether to extend credit to you. Each lender may prioritize these differently when measuring your credit risk.

Capacity

"Capacity" refers to your financial ability to repay your credit card balances or other types of debts. According to the Consumer Financial Protection Bureau your debt-to-income ratio (DTI) determines your financial capacity.

To find your DTI, divide your total monthly debt by your gross monthly income (and then expressed as a percentage). Your debt includes things like housing, loans, and credit card balances. Debt doesn’t include controllable expenses like groceries, gas, or utilities.

As an example, if your monthly bills total $1,800 and you make $6,000 a month, your DTI is around 30%. Usually, the lower your DTI, the better your chances for credit approval.

To improve your capacity, and your likelihood of qualifying for a loan or credit card, work to reduce your DTI. Since capacity primarily focuses on a monthly scale, paying your debt down enough to reduce monthly payments could improve your overall DTI.

Character

Your “character” refers to your credibility based on past behaviors, like paying bills on time. Lenders examine your previous financial habits to predict how you might handle any new debt.

Your credit history plays a role in your financial character. Want to see your own credit history? The easiest way is to look at your credit report, which you can get for free at AnnualCreditReport.com.

Your credit report shows information on your credit accounts, loans, and bankruptcies from the last seven to ten years. This includes repayment behavior, 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.

The steps that improve your credit score also strengthen your character: paying bills on time and reducing your credit utilization ratio. If you’re unable to repay your entire balance, make at least the minimum payment required each month.

Capital

“Capital” refers to the total amount of money (savings or investment accounts) which you could use to repay a loan in the event your income is disrupted. Unsecured credit cards don't require a down payment, so your capital won’t play a part in consideration for a card.

However, saving up in advance could improve your capital if you’re considering a major purchase like a car or a house. For mortgages and auto loans, capital usually refers to your down payment. A bigger down payment could demonstrate more financial security and result in a smaller monthly loan payment.

For a hands-off method of saving money, keep your down-payment funds in a separate 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. For a mortgage, your home is the collateral; for an auto loan it’s your vehicle.

An unsecured loan doesn’t require the borrower to provide collateral. Personal loans, most credit cards, and student loans are unsecured loans.

Unsecured credit cards don’t require collateral. In contrast, a secured credit card requires a refundable security deposit. Your security deposit is usually equal to your credit limit on the card.

If you plan to apply 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?

With the Discover It^® Secured Credit Card, you can upgrade to an unsecured card after six consecutive months of on-time payments and maintaining 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 Small Business Administration) or your credit card or loan’s unique terms (like interest rate, to determine whether it’s an appropriate fit for you according to Vermont.gov).

Even the country’s overall economic health and future predictions play a role in 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 credit worthiness for a credit card or loan approval. However, applying for a credit card or loan that aligns with your circumstances and needs can improve your approval odds.

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.

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