The Five C’s of Credit

The Five C’s of Credit

Every loan starts somewhere. Most of them start with these.

When we were very young, we learned that C was for “cookie,” and that was good enough.

As adults, however, we’ve come to understand that there are five other C’s we need to focus on when it comes to our credit. This framework of credit qualities - character, capacity, capital, collateral, and conditions - are one of the first ways that credit unions gauge creditworthiness, and how we measure up is important.

Depending on the lender, some C’s can be more important than others in certain circumstances-there aren’t any hard-and-fast rules (more like guidelines). The goal is to take a thorough look at the whole picture before approving a loan that might not be the right fit for either the credit union or the borrower.


This is essentially a loan officer’s assessment of someone’s track record of repaying debts. This is where those credit reports from Experian, TransUnion and Equifax get requested and reviewed (these are how your FICO credit score is generated). Sometimes this is referred to as “credit history,” but really, it’s more than that. Lenders also tend to put some emphasis on references and reputations—and the interactions that they have with members. Trust is built on good relationships and clear communication.

Bottomline, institutions lend money to people who keep their commitments and are financially responsible.


Will you be able to repay the loan? Based on a comparison of your income and your expenses, and your debt-to-income ratio, lenders are looking to make sure you can actually pay them back—not just that you want to. Capacity is also sometimes referred to as “cash flow.” Additionally, things like the length of time you’ve been at your job, for example, are other indicators that you’ve got a stable financial situation. This consideration is another opportunity to make sure you’re looking at the right loan for your situation.


Putting any existing money toward the loan you’re asking for (like a down payment on a home) is another thing that makes a big difference. From a lender’s perspective, a significant contribution of your own savings, for example, decreases the chances that you’ll default on the loan—it’s an indication that you’re serious about this relationship and your goals.


Collateral acts as a backup, in case you can’t repay your loan. It’s a pretty straightforward idea: if you can’t make your payments anymore, the lender can repossess an asset. A car loan is secured by the car, mortgages are secured by the house, and so on. It’s a second source of repayment.


What are you using the loan for? If you’re borrowing money for a home or a car—a specific, definable purpose—then the conditions of the loan you’re applying for (e.g. the interest rate, amount of principal) might be more favorable, compared to a more open-ended loan that could be used for anything. Conditions can also be influenced by economic factors or other larger-picture variables. Basically, knowing as many specifics about what you’re going to be doing with the loan, and which external economic influences might have an impact on your ability to repay it, is an important part of the lender’s job.

By understanding these Five C’s of Credit, and planning around them, you’ll be better prepared when you sit down with a loan officer and start the process. It might not hurt to bring cookies, though. Just a thought.