Planning to Borrow Money? Know the Five C’s of Creditworthiness

When I worked in banking, personal and small business lending was a major part of my duties. Customers were often nervous about applying for credit – unnecessarily in most cases. But, sometimes people had really no idea of what we required before we could consider the application.

I had people applying for a mortgage with not one penny of down payment.

Applicant: “I can get the money when I need it.”

Me: “Well, you actually need it right now.”

Some offered leased vehicles for collateral on consolidation loans.

Me: “You know, you don’t actually own that vehicle.”

Applicant: “Yes, I do. I’m making payments on it every month.”

A low credit score was often discounted.

Applicant: “I didn’t know I had to make credit card payments every month.”

And some people didn’t even have a job (or other source of income).

Borrowing money? Know your five c's of credit

Understand what a lender is looking for

How does a financial institution determine whether a potential borrower is eligible for a loan, mortgage or line of credit?

Most lenders use the five C’s of credit to determine the strength of an application.

1. Credit

This is the most important requirement of any financing application. Your lender wants to know how you have paid your debts in the past and how much you owe in comparison to the limits available to you. Your credit report details establishes a credit score which represents your track record and gauges your creditworthiness.

Sometimes bad things happen to good people and your credit report may show late payments or unpaid collections, etc. Make sure you clean up any past problems, start making your payments on time and work at reducing your credit card balances. You may still be okay if your other C’s are strong.

2. Capacity

Capacity is a borrower’s ability to repay the loan. It’s not just your current income, it’s the length of time at your job and your employment stability as well. It also assesses your debt to income ratio. Your lender wants to ensure that your payments will be affordable for you, both now and in the future.

Make sure you are living within your means and don’t overextend your credit. Better yet, pay down, or pay off your credit card debts.

3. Capital

This “C” stands for cash. How much of your own money are you using? A large down payment on a house or car, for example, basically indicates your level of commitment and decreases the chance of default.

Be a saver. Show that you have some liquidity to fall back on in case of hard times.

4. Collateral

Collateral is security for the loan or mortgage – an automobile, or your house, for example. It gives the lender the assurance that, in case of default, the lender can repossess the collateral, sell it and repay the loan. It also applies to an outside party who is willing to co-sign or guarantee the loan.

5. Character

Character represents the overall impression you and your credit application are making on your lender. As well as your past repayment history, employment and residence stability, the lender is “reading between the lines” to determine if there are any underlying risks in lending to you.

Final thoughts

The five C’s of credit are widely used by all types of lenders. They are the basic building blocks used when evaluating a potential borrower’s request and determining their chance of approval.

It is crucial that you are honest and forthcoming with your information, and your lender has all the relevant details they need.

Since every situation is unique, a good lender will take the time to review the entire package and ask questions for further details and explanations.

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  1. Owen @ PlanEasy on May 17, 2017 at 6:04 am

    Nice summary of what it takes it get a loan. The process banks go through to qualify a loan does seem somewhat mystical at times. Probably feels this way because you don’t usually get to see the numbers before hand so it’s sometimes a surprise with what they come back with.

  2. Fred Ziffel on May 17, 2017 at 5:42 pm

    How does that last C – character – work when there is an online application or the lender doesn’t actually know you personally, a la George Bailey in It’s a Wonderful Life?

    • boomer on May 17, 2017 at 6:53 pm

      @Fred Ziffel: When I worked in the bank, we had a computer generated approval system which worked pretty well for the majority of clients. The last “c” is that gray area where the other “c”s are not quite good enough for an approval and I needed to delve more into all the circumstances. An experienced lender can often make it work.
      In answer to your question I would venture to say an online application like I just mentioned would be declined.

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