The “five C’s” of credit

How do lenders decide whether or not to loan you money? Many look at five factors.

Instructions: Click each “C” to learn more.

Credit history

The word 'Approved' is stamped on top of a checklist with the words credit history, capacity, capital, collateral, and conditions.

When lenders evaluate credit history, they look at stability — for example, how long you’ve lived at your current address, how long you’ve been in the military, or how long your spouse has held his or her job, and whether you have a good record of paying your bills on time and in full. If you or your spouse own a business and need a loan, the lender may consider your experience and track record in your business and industry to evaluate how likely you are to repay.


Capacity refers to considering your other debts and expenses when determining your ability to repay the loan. Creditors evaluate your debt-to-income ratio, that is, how much you owe compared to how much you earn. The lower your ratio, the more confident creditors will be in your capacity to repay the money you borrow.


Capital refers to your net worth — the value of your assets minus your liabilities. In simple terms, how much you own (for example, car, real estate, cash, and investments) minus how much you owe.


A man at a gas station getting into his car.

Collateral refers to any asset of a borrower (for example, a car or home) that a lender has a right to take ownership of and use to pay the debt if the borrower is unable to make the loan payments as agreed.

Some lenders may require a guarantee in addition to collateral. A guarantee means that another person signs a document promising to repay the loan if you can’t.


Lenders consider a number of outside circumstances that may affect the borrower’s financial situation and ability to repay, for example what’s happening in the local economy. If the borrower is a business, the lender may evaluate the financial health of the borrower’s industry, their local market, and competition.

Some lenders develop their own loan decision “scorecards” using aspects of the five C’s and other factors. Example: borrower’s credit used vs. credit available.

Click the Next button to learn about your credit score.