Credit Scores & Credit Monitoring The 5 Cs of Credit Thinking of Applying for a Loan? Learn the 5 Cs of Credit First By Aly J. Yale Updated on September 23, 2022 Reviewed by Somer G. Anderson Reviewed by Somer G. Anderson Somer G. Anderson is CPA, doctor of accounting, and an accounting and finance professor who has been working in the accounting and finance industries for more than 20 years. Her expertise covers a wide range of accounting, corporate finance, taxes, lending, and personal finance areas. learn about our financial review board Fact checked by David Rubin In This Article View All In This Article Character Capacity Collateral Capital Conditions What Will Your Lender See? Photo: Bloom Productions / Getty Images When you apply for a mortgage loan, personal loan, business loan, or any other type of financing, your lender will use your credit history to evaluate your risk as a borrower. They want to know how likely you are to repay the loan. But it's not just your numerical credit score that matters during this evaluation. There are five factors of creditworthiness that a lender will look at, dubbed the "5 Cs." Understanding these factors, as well as how they influence your overall credit picture, can help you better prepare for your loan application and ensure financing success. 1. Character Your credit "character" speaks to your overall trustworthiness as a borrower. Can you be reasonably expected to repay your loan? Will you make your payments on time, every time, month after month? Your credit score and credit history both play big roles in the character aspect. Specifically, lenders want to see: A long history of using credit (cards, loans, and similar accounts) Consistent, on-time payments across all accounts All current credit accounts are in good standing (not overdue or in collections) If you're applying for a business loan or other professional-related financing, evaluating character might also entail verifying your business license and other credentials, looking into your employment and business history, and understanding your educational accomplishments. 2. Capacity Capacity is also often referred to as "cash flow," and it's the barometer for how well you can manage your future loan payments. To assess this, lenders will look at your income (either as an individual or as a business), as well as the stability of that income. Your debt-to-income ratio—both currently and after your new loan—will also play a role. 3. Collateral When you borrow a significant amount of money, the lender needs to know they're protected if you don't repay those funds. Collateral—or assets that can be sold and used as a backup source of repayment—offers just such protection. In the case of a mortgage loan, the collateral is the home itself. If you don't make your mortgage payments, the lender can foreclose on the home, sell it off, and recoup their lost funds. Other sources of collateral might be: Cash or checking and savings account balancesBusiness inventory or equipmentCarsReal estateUnpaid invoices 4. Capital Capital is essentially how much skin you have in the game. To assess this, the lender will look at the investments made in your business, as well as things like the equipment and inventory you've purchased. If you're applying for financing for a car or house, they'll look at the down payment you're putting toward the purchase. Basically, lenders want to see that you're putting your money on the line just as you want them to. Think of it like this: If you don't believe in your business or big-ticket purchase enough to invest in it, why should they? 5. Conditions This one has more to do with outside factors than your personal finances. The lender will consider things like: The economyYour industry (if applying for a business loan)The stability of your business or jobThe market for the product you’re buying (the housing market, for example) The lender will also take into account how you're going to use the money they lend you. Will it be used for renovating a home? Hiring new employees? Purchasing new equipment? They want to see that you're making smart financial decisions that will improve the business for the long haul. What Will Your Lender See? If you want to understand what a lender might see when evaluating your application, start by pulling your credit report. You're normally entitled to one free credit report annually from all three credit bureaus—Experian, TransUnion, and Equifax. To start, go to AnnualCreditReport.com. Note You can get one free credit report per week from Equifax, TransUnion, and Experian through December 2023 at AnnualCreditReport.com. Want a better shot at landing the loan? Take steps to improve your credit picture before applying for a loan: Pay your bills on time, month after month (automate your payments if necessary)Reduce your debts where possibleAvoid opening any new accounts or cards until after your loan is fundedIncrease your savings balancesRequest a credit limit increase on your existing cards (but don't use it) Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Bank of America. "5 C's of Credit: What Are Banks Looking For?" PR Newswire. "Equifax, Experian and TransUnion Extend Free Weekly Credit Reports in the U.S. Through 2023."