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What Are the 5 Cs of Credit?

5 min read

Last Updated: April 4, 2025

Table of contents

Key Takeaways

A lender might use these factors to approve your credit application: capacity, capital, character, collateral, and conditions.
A credit issuer or might decide whether to extend credit or a loan to you based on your specific 5 Cs.
Cultivating your own 5 Cs can help you qualify for a new credit card or get the best loan terms.

Have you ever wondered how a lender decides to approve you for a credit card or personal loan? There are several things lenders measure, including the "5 Cs of Credit." These include:

Capacity
Capital
Character
Collateral
Conditions

When you know what each of the 5 Cs of credit are, it might help you access credit in the future.

Why are the 5 Cs important?

A credit issuer or financial institution might decide whether to extend credit or a loan to you based on your specific 5 Cs. They give insight to a lender on your ability to make loan payments or credit card payments, how much of a loan amount you can afford to pay back, and your history of paying back other debts. 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 loans. Your debt-to-income ratio (DTI) provides an overview of how much your monthly debts take up of your overall monthly gross income. Your DTI ratio determines your financial capacity. Usually, the lower your DTI, the better your chances for credit approval.

To find your DTI, divide your total monthly debt by your gross monthly income (and then express 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.

Let’s say your debts add up to $2,200 per month, and your monthly gross income is $7,000 per month. By dividing your debts by your income, you get your DTI. $2,200 divided by $7,000, then multiplied by 100 gives you debt-to-income ratio of about 31%.

Do you want 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 past behaviors with debt, like paying bills on time. Lenders examine your previous financial habits to predict how you might manage 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 about your credit accounts, loans, and bankruptcies over 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 to make a credit analysis.

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) you could use to repay a loan if your income changes. A standard, unsecured credit card doesn’t require a down payment, so your capital won’t play a part in consideration for a card.

But if you’re considering a major purchase like a car or a house, saving up could improve your capital. 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 the money for your down-payment 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 potential 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 on-time payments and six months of good status on all your credit accounts.¹

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Conditions

“Conditions” refer to factors outside your control that may affect your ability to repay a loan or credit card. These conditions can include aspects of your professional life (how long you’ve been at your job and the industry outlook), federal interest rates, and changing economic conditions.

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 a lending decision. However, applying for a credit card or loan that aligns with your circumstances and needs can improve your approval odds.

The bottom line

Knowing the 5 Cs of credit means understanding the factors that decide your eligibility. It’s good knowledge to have in your financial literacy toolbox. 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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