The 5Cs of credit is a process that a lender uses to help them determine how credit worthy an individual is before lending them money. When a lender receives an application they will consider all the 5Cs but depending on what credit product you’re applying for some might place a higher weighting on certain factors.
The 5Cs of credit are:
Let’s look at each a little more closely. A person’s character looks at how a person has handle their credit. It’s not about if you’re a nice person or a bad person. It about how you’ve behaved with credit you’ve had, if you have any. The lender is trying to get an idea of how credit mature you are to get an idea of how likely you are to meet your obligations to pay back the money as agreed.
Credit refers to your credit bureau and seeing if you have a good credit repayment history and credit score. Capacity refers to your ability to afford the required payment to debt service the loan or product you’re apply for. The lender might consider ratios such as TDSR, GDSR, or other similar ratios.
Capital in simple terms refers to your fall back position. If something were to go wrong or you lose your job do you have something to fall back on. If you have a saving reserve to tap into you’re less likely to default and able to get through the tough times. With collateral the lender is looking at if you’ve got an asset to offset any potential risk or loses. For example, when applying for a secured line of credit the lender secures the credit line against the home. By doing this they reduce their risk exposure in the event you default they have an asset they can put up for sale in order to offset any potential loses they might face.
Lenders look at the 5Cs together to try and get an accurate picture of a potential borrower. It’s not the only thing a lenders will consider but it’s a process you should keep in mind when your applying for credit.
How do you stack up against the 5Cs? Would you be a good candidate for a potential loan? Share your comments and thoughts below.