When you apply for a loan, lenders assess your credit risk based on a number of factors, including your credit/payment history, income, and overall financial situation. Here is some additional information to help explain these factors, also known as the “5 Cs”, to help you better understand what lenders look for:
Credit history
Qualifying for the different types of credit hinges largely on your credit history — the track record you’ve established while managing credit and making payments over time. Your credit report is primarily a detailed list of your credit history, consisting of information provided by lenders that have extended credit to you. While information may vary from one credit reporting agency to another, the credit reports include the same types of information, such as the names of lenders that have extended credit to you, types of credit you have, your payment history, and more. You can get a free copy of your credit report every 12 months from each of the 3 major credit reporting companies (Equifax®, TransUnion®, and Experian®) at annualcreditreport.com.
In addition to the credit report, lenders may also use a credit score that is a numeric value – usually between 300 and 850 – based on the information contained in your credit report. The credit score serves as a risk indicator for the lender based on your credit history. Generally, the higher the score, the lower the risk. Credit bureau scores are often called "FICO® Scores" because many credit bureau scores used in the U.S. are produced from software developed by Fair Isaac Corporation (FICO). While many lenders use credit scores to help them make their lending decisions, each lender has its own criteria, depending on the level of risk it finds acceptable for a given credit product.
Eligible Wells Fargo customers can access their FICO Credit Score through Wells Fargo Online® - plus tools, tips, and much more. Don't worry, requesting your score in this way won't negatively affect your score.
Capacity
Lenders need to determine whether you can comfortably afford your payments. Your income and employment history are good indicators of your ability to repay outstanding debt. Income amount, stability, and type of income may all be considered. The ratio of your current and any new debt as compared to your before-tax income, known as debt-to-income ratio (DTI), may be evaluated. Learn more about DTI and use our online calculator to see where you stand and get answers to common questions.
Collateral (when applying for secured loans)
Loans, lines of credit, or credit cards you apply for may be secured or unsecured. With a secured product, such as an auto or home equity loan, you pledge something you own as collateral. The value of your collateral will be evaluated, and any existing debt secured by that collateral will be subtracted from the value. The remaining equity will play a factor in the lending decision. Keep in mind, with a secured loan, the assets you pledge as collateral are at risk if you don’t repay the loan as agreed.
Capital
While your household income is expected to be the primary source of repayment, capital represents the savings, investments, and other assets that can help repay the loan. This may be helpful if you lose your job or experience other setbacks.
Conditions
Lenders may want to know how you plan to use the money and will consider the loan’s purpose, such as whether the loan will be used to purchase a vehicle or other property. Other factors, such as environmental and economic conditions, may also be considered.
The 5 C’s of Credit is a common term in banking. Now that you know them, you can better prepare for the questions you may be asked the next time you apply for credit.
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Products to Consider
- Credit Cards
- Personal Loans
You must be the primary account holder of an eligible Wells Fargo consumer account with a FICO® Score available, and enrolled in Wells Fargo Online®. Eligible Wells Fargo consumer accounts include deposit, loan, and credit accounts, but other consumer accounts may also be eligible. Contact Wells Fargo for details. Availability may be affected by your mobile carrier's coverage area. Your mobile carrier’s message and data rates may apply.
Please note that the score provided under this service is for educational purposes and may not be the score used by Wells Fargo to make credit decisions. Wells Fargo looks at many factors to determine your credit options; therefore, a specific FICO® Score or Wells Fargo credit rating does not guarantee a specific loan rate, approval of a loan, or an upgrade on a credit card.
This calculator is for educational purposes only and is not a denial or approval of credit.
FICO is a registered trademark of Fair Isaac Corporation in the United States and other countries.
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FAQs
The five Cs of credit are important because lenders use these factors to determine whether to approve you for a financial product. Lenders also use these five Cs—character, capacity, capital, collateral, and conditions—to set your loan rates and loan terms.
What are the five Cs of credit that lenders look at? ›
The five C's, or characteristics, of credit — character, capacity, capital, conditions and collateral — are a framework used by many lenders to evaluate potential small-business borrowers.
Which of the 5 Cs is the most important in lending decisions? ›
When you apply for a business loan, consider the 5 Cs that lenders look for: Capacity, Capital, Collateral, Conditions and Character. The most important is capacity, which is your ability to repay the loan.
What are the 5 Cs that banks look for during a credit due diligence? ›
5 Cs of Credit
- Character (applicant's credit history)
- Capacity (applicant's debt-to-income ratio)
- Capital (applicant's capital strength)
- Collateral (applicant's assets that can be pledged against the loan)
- Conditions (what is the loan to be obtained for and the amount?)
The bank must consider the five "C's" of credit each time it makes a loan. Capacity refers to your ability to repay the loan. The prospective lender will want to know exactly how you intend to repay the loan.
What are the 5 Cs of credit and how may they impact how lenders see you? ›
Character, capacity, capital, collateral and conditions are the 5 C's of credit. Lenders may look at the 5 C's when considering credit applications. Understanding the 5 C's could help you boost your creditworthiness, making it easier to qualify for the credit you apply for.
What are the 5c conditions? ›
The 5 Cs are Character, Capacity, Capital, Collateral, and Conditions.
Why do lenders use the five Cs? ›
The 5 Cs of Credit analysis are - Character, Capacity, Capital, Collateral, and Conditions. They are used by lenders to evaluate a borrower's creditworthiness and include factors such as the borrower's reputation, income, assets, collateral, and the economic conditions impacting repayment.
What does a lender look at before granting credit? ›
Lenders need to determine whether you can comfortably afford your payments. Your income and employment history are good indicators of your ability to repay outstanding debt. Income amount, stability, and type of income may all be considered.
Which of the 5 Cs of credit requires that a person be trustworthy? ›
1. Character. A lender will look at a mortgage applicant's overall trustworthiness, personality and credibility to determine the borrower's character. The purpose of this is to determine whether the applicant is responsible and likely to make on-time payments on loans and other debts.
Some of the easiest loans to get approved for if you have bad credit include payday loans, no-credit-check loans, and pawnshop loans. Personal loans with essentially no approval requirements typically charge the highest interest rates and loan fees.
How do banks determine if you qualify for a loan? ›
Most personal loan lenders review your credit score, credit history, income and DTI ratio to determine your eligibility. While the minimum requirements for each of these factors vary for each lender, our recommendations include: Minimum credit score of 670.
What habit lowers your credit score? ›
Answer. These are a few typical examples: Late or missed payments, High credit card balances, Closing credit accounts, and Defaulting on a loan.
Which of the 5 Cs of credit help determine the ability to repay a loan based upon incoming and outgoing cash flow? ›
Capacity or cash flow measures the business's ability to repay a loan. Our lenders will compare current income with recurring debts and evaluate the business's debt-to-income ratio.
What gives you the capacity to take on debt? ›
Debt Capacity is the maximum amount of leverage that a company could afford to incur, determined by its free cash flow (FCF) profile and market positioning.
Which of the 5 Cs represents the financial ability to repay a loan with your current income or job? ›
Capacity assesses a borrower's financial ability to repay a loan, determined by evaluating their debt-to-income (DTI) ratio.
What are the 5 Cs of credit quizlet? ›
Collateral, Credit History, Capacity, Capital, Character.
What are the 5 P's of finance? ›
Profitability is affected by a variety of factors – not all of which are strictly financial. I refer to these as the “Five Ps” of business success: Product, Pricing, People, Process, and Planning.
Which of the following 5 Cs of credit includes information on the purpose of the loan the amount involved and prevailing interest rates? ›
The Five Cs of Credit
Collateral – Assets you can provide the lender as an additional form of security, should you not be able to repay the loan. Conditions – The purpose of the loan, overall industry health, and loan specifics like interest rate and loan amount.
What are the 5 Cs of credit from practical money skills? ›
A credit score is dynamic and changes according to how much debt you accrue and how you manage your bills. To build credit wisely, learn how the Five C's of Credit – character, capital, capacity collateral and capacity — can affect your credit score and how you can use these five factors to strengthen your credit: 1.
