Applying for credit can feel a bit like taking a test. If you aren’t sure of your answers, you’ll probably be anxious about your results. It may be helpful for you to view your credit standing from a lender's perspective by using the 5 C's of credit: 

  1. Capital: Your capital is comprised of your savings, investments, and other assets that you can use to repay the loan. Capital can be helpful if you lose your job or experience other setbacks.
  2. Capacity: Lenders will gauge your ability to repay the loan you’re applying for based on your current situation, and the amount of debt and expenses you currently have. Lenders will typically calculate your debt-to-income ratio – or how much you owe vs. how much you earn – to gauge your risk. The lower your ratio, the less risky lending to you may seem. 
  3. Collateral: With some loans, you’re required to offer an asset (for example, a home or car) that the lender can take possession of in the event that you are unable to make loan payments. Some lenders may require a guarantee in addition to collateral, which means that you or a third party must agree to repay the loan if the collateral cannot cover the amount.
  4. Conditions: These are outside circumstances, such as the economy and job market, that can influence your ability to repay a loan. However, this category also includes how you intend to use the loan. For instance, obtaining a loan to pay for graduate school would seem less risky than a loan being used for a family vacation, since the degree would most likely improve your profitability in the long run.
  5. Credit history: Lenders will check your credit report and score. Together they show lenders your credit accounts, payment history, and level of risk.  


Some lenders may require a guarantee in addition to collateral.

If you use these C’s to proactively manage your credit, you’ll be better prepared to make the grade when it comes time to apply for a line of credit or a loan.

When lenders are looking at your credit capacity, which of the following do they consider?

Next Question


Empower yourself with financial knowledge

We’re committed to your financial success. Here you’ll find a wide range of helpful information, interactive tools, practical strategies, and more — all designed to help you increase your financial literacy and reach your financial goals. 

My Financial Guide