Logo

The 5 Cs of Credit: What They Are & How to Improve Them

6 min read
5CsOfCredit

Key Takeaways

  • Lenders use the 5 Cs of credit (character, capacity, capital, collateral, conditions) to decide if you can get a loan or credit card.

  • Character means your past credit history and how well you have paid your debts.

  • Capacity is your ability to handle new debt based on your income and current debts.

  • Capital refers to the money you are willing to put towards the loan, like a down payment.

  • Collateral is an asset you promise to give up if you don't repay the loan, like a house or car.

  • Conditions are external factors like the economy and how you plan to use the loan money.

When you apply for a loan or credit card, many lenders may use the 5 Cs of credit— character, capacity, collateral, capital, and conditions—to determine your eligibility and the terms of your financing agreement. The 5 Cs of credit are measures of how you handle your current credit obligations and your ability to repay a loan.

Understanding how each of these factors impacts a lender’s decision-making can potentially increase your odds of getting approved and scoring more favorable rates and terms.

What Are the 5 Cs of Credit?

The 5 Cs of credit are: character, capacity, capital, collateral and conditions. The 5 Cs of credit give lenders insight into your past financial behavior to predict your future behavior. Lenders may look at these five criteria and use their findings to determine if you’re a reasonable credit risk.

1. Character

Your financial character is a lender’s evaluation of your overall credit history or how you’ve managed debt in the past. To evaluate your financial character, many lenders pull your credit report from one or all of the three major credit bureaus: Experian, Equifax and TransUnion.

When reviewing your credit history, lenders look for:

  • Payment history to see if you’ve made timely payments in the past.

  • Recent credit activity, such as the number of new accounts opened recently.

  • Defaults, like bankruptcies or accounts sent to collections.

  • Credit score for a snapshot of your overall credit health.

And when it comes to credit scores, the higher, the better. The higher your credit score, the lower the risk you present to the lender, as you’re more likely to repay the loan. Higher scores typically mean that you will get lower rates, which could translate into less interest paid over the life of your loan.

Tips for navigating Character:

  • Monitor your credit score and credit report for inaccuracies.

  • Bring delinquent accounts current to show a responsible current payment history.

  • Make future payments on time to build a track record for responsible borrowing.

2. Capacity

Capacity is about your ability to responsibly manage additional debt alongside your current obligations. To determine your capacity, lenders review your income, employment history, and outstanding debts. From there, lenders calculate your debt-to-income ratio (DTI)—your total debt payments divided by your gross monthly income, expressed as a percentage—to determine your capacity.

Lenders typically have a maximum DTI they’ll allow for borrowers, often as high as 50%. However, the lower your DTI, lenders tend to view your Capacity to responsibly take on new debt more favorably.

Tips for navigating Capacity:

  • Keep your credit utilization below 30% to demonstrate responsible use of available credit.

  • Pay down existing debt to improve your DTI ratio.

  • If you’re thinking of changing jobs, you may want to apply for a new loan while you are still at your current job, as employment history and stable income are important factors. Keep in mind many lenders will do a final check to verify employment and income right before approval. 

3. Capital

Capital is how much money you’re willing to commit to a loan. From a lender’s perspective, the more cash you have invested in a mortgage or auto loan, the less likely you will default on your payments.

Conventional mortgages typically require down payments between 3% and 20% when buying a home. With auto loans, however, lenders might not require a down payment. In those cases, you could qualify for a lower interest rate by making a down payment to demonstrate your commitment to the loan. Lenders like to see you have “skin in the game.” So while not all loans require that you put up some cash, doing so may improve your approval odds in certain situations.

Tips for navigating Capital:

  • Be willing to delay a major purchase until you’ve saved up for a down payment that will earn you the most favorable borrowing terms.

  • Research your lending options and know the down payment requirements for the loan type or lender you want to use.

  • Create a budget that makes saving for a down payment part of your monthly financial goals.

4. Collateral

Collateral is only relevant to certain types of loans and credit cards. When applying for a secured loan like a mortgage, auto loan or secured credit card, you’ll be required to put up collateral to get approved.

Collateral is an asset (or amount of money) you agree to give up to the lender if you default on your loan. Some common types of collateral include:

  • Secured credit cards, secured by a cash deposit equal to a portion of your credit limit.

  • Mortgages, secured by the home you’re buying or refinancing.

  • Auto loans, secured by the car you’re buying or refinancing.

When you apply for a secured loan, the lender will assess the collateral’s value, minus any debt that already uses that asset as collateral. If the asset is worth less than the amount you want to borrow, you may be declined or required to pay a higher interest rate or other fees.

Tips for navigating Collateral:

  • Get an appraisal to ensure a property’s purchase price is at its appraised value.

  • Determine the market value of your trade-in and the car you want to buy before applying for auto loan financing.

  • Review a secured credit card’s terms to understand the cash you’ll need as collateral for card approval.

5. Conditions

Conditions refer to economic factors like the economy, why you need the loan and how you’ll use the money. Of all the 5 Cs of credit, Conditions is the one you have the least control over.

For example, you may be asked how you plan to use the loan funds. Some lenders may even restrict how you can use your loan proceeds.

Conditions can also refer to the market environment in which the loan is being made. During an economic downturn, for instance, lenders may tighten their underwriting guidelines, making it more challenging to get approved for a personal loan, mortgage, or credit card. Market interest rates, industry trends and other economic factors are all relevant.

Tips for navigating Conditions:

  • If applying for credit during an economic downturn, use the other four Cs to improve your chances for approval.

  • Research current interest rates for insights on rates you can expect for a specific type of loan before applying for credit.

Which of the 5 Cs Is the Most Important?

Unfortunately, no single C stands out to lenders as the most important. Depending on factors like loan type and current economic conditions, different lenders may weigh each of the Cs differently.

For example, when applying for a secured credit card, your Collateral may be more important to a card issuer than your Character because they could keep your cash if you failed to make your payment.

On the other hand, an auto lender might place equal importance on your Character, Capital,
and Collateral (the car you’re financing). Here, the lender knows they could repossess the car if you don’t pay, and use the other Character and Capital to determine your loan’s interest rate.

Knowing a lender’s qualification criteria (such as for a personal loan) can help you focus on the Cs most relevant to your situation.

The Bottom Line

Now that you know more about the 5 Cs—Character, Collateral, Capital, Capacity—and why they matter, you can use them to your advantage to improve your borrowing experience anytime you need to apply for credit.

Here are a few final takeaways for understanding and navigating the 5 Cs of Credit:

  • Control what you can. While you can’t control the economy, you can pay down your existing debt and keep your payments current.

  • Research lenders. Compare multiple lenders to ensure you’re getting the best rates and terms for where your 5 Cs are today.

  • Keep emotions in check. While you might want to make a purchase today, consider how you could decrease costs by improving your credit or saving a larger down payment.

You May Also Like

Related Resource Center
Too much credit card debt is when monthly payments exceed 30% of your income, leading to financial strain, difficulty covering essential expenses, and increased risk of defaulting.
Sep 23, 2024
8 min read
11 Signs You Have Too Much Credit Card Debt [+4 Ways to Pay It Off]
Credit scores are three-digit numbers ranging from 350 to 850 calculated from credit bureau-reported data that represent a snapshot of your credit health and history. A high credit score is an indicator to potential creditors there’s a higher probability you’ll repay your debt.
Aug 5, 2024
7 min read
Twenty20-294-1110x453
Using fixed, low-interest credit to refinance variable, high-interest credit card balances can be a smart financial move. This practice, known as debt consolidation, can simplify your monthly finances, make your payments more predictable, and save you money on the cost of borrowing.
Aug 1, 2024
4 min read
blog consolidatedebt
There are many reasons to consider a joint personal loan, including sharing the payment obligations, securing better financing terms, and improving your odds of approval. So, if your credit history is holding you back from getting favorable interest rates and terms on your own, having a co-borrower could help you qualify for a personal loan.
Jul 23, 2024
5 min read
How to Apply for a Joint Personal Loan
If you receive a cash windfall, using the money to clear debt ahead of schedule can save on interest. However, if your loan terms include a prepayment penalty or you're in the process of rebuilding your credit history, you may want to think twice.
May 20, 2023
6 min read
The Pros and Cons of Paying Off a Personal Loan Early
Related Impact
From groceries and diapers to Halloween costumes for pets, nearly 60% of American consumers prefer to shop online for everyday items that make life more convenient, comfortable, and enjoyable. And with rising prices showing no signs of stopping anytime soon, we’re pleased to introduce StackitTM from LendingClub Bank—a new browser extension that automatically finds and rewards eligible members with coupons and cash back for extra savings at more than 15,000 favorite online retailers.
Nov 13, 2022
2 min read
blog header stackit 765x430 v1-1
Even in today’s low-yield, high-inflation environment, it’s essential to keep a certain amount of money in an easy-to-access checking or savings account for things like daily household and emergency expenses, or to meet short-term financial goals.
Oct 2, 2022
5 min read
LendingClub Rewards Checking Nationally Certified as Trusted, Afforda
Since 2007, LendingClub has been on a mission to deliver a world-class experience to all our members. This month we took a moment to reflect on the more than four million members who have chosen LendingClub as their partner to help them reach their financial goals.
Apr 19, 2022
2 min read
Illustration of large number 4 and letter M made up of colorful, tiny illustrations of ethnically diverse people
In March 2022, we hosted our first quarterly webinar where we celebrated our one-year anniversary as a digital marketplace bank. 
Mar 6, 2022
less than a minute read
Blog-post
LendingClub completed the acquisition of Radius Bank in February 2021. At that time, in addition to the direct-to-consumer deposit business, we inherited a fintech partner program, and several lending businesses. As we reach the one-year anniversary of the acquisition, and in conjunction with the conclusion of a strategic review of our business operations, we have made the decision to discontinue certain businesses that don’t fit our mission.  
Jan 2, 2022
2 min read
Man in blue button up shirt and glasses smiling
Related FAQ's
While funding issues don’t happen often, it’s possible a loan may not get fully funded.
Jun 7, 2023
less than a minute read
If you're having trouble making your payments, we encourage you to reach out to us before enrolling with a debt settlement company.
Jun 7, 2023
2 min read
Once you submit your application, we may ask you for additional paperwork to verify your information.
Jun 7, 2023
2 min read
Your annual percentage rate (APR) is the overall yearly cost of your loan, including fees and interest. The APR on LendingClub Bank loans ranges from 6.34% to 35.89%.
Jun 7, 2023
less than a minute read
Applying for a lending product is fast, easy, and confidential.
Jun 7, 2023
less than a minute read
Related Glossary
{noun} A type of credit that allows the borrower to make charges and payments against a set borrowing limit, paying interest only on outstanding balances.
Sep 6, 2023
4 min read
{noun} The total annual cost to borrow money, including fees, expressed as a percentage.
Mar 21, 2023
3 min read
{noun} The amount of unpaid interest that has accumulated as of a specific date, either on a loan or an interest-bearing account or investment. 
Mar 21, 2023
4 min read
A debt that is written off as a loss because the financial institution or creditor believes it is no longer collectible due to a substantial period of nonpayment.
Feb 7, 2023
3 min read
{noun} An interest rate that remains the same for a set time, usually for the life of the loan.
Feb 4, 2023
3 min read

LendingClub Bank and its affiliates (collectively, "LendingClub") do not offer legal, financial, or other professional advice. The content on this page is for informational or advertising purposes only and is not a substitute for individualized professional advice. LendingClub is not affiliated with or making any representation as to the company(ies), services, and/or products referenced. LendingClub is not responsible for the content of third-party website(s), and links to those sites should not be viewed as an endorsement. By clicking links to third-party website(s), users are leaving LendingClub’s website. LendingClub does not represent any third party, including any website user, who enters into a transaction as a result of visiting a third-party website. Privacy and security policies of third-party websites may differ from those of the LendingClub website.

Savings are not guaranteed and depend upon various factors, including but not limited to interest rates, fees, and loan term length.

A representative example of payment terms for a Personal Loan is as follows: a borrower receives a loan of $19,584 for a term of 36 months, with an interest rate of 10.29% and a 6.00% origination fee of $1,190 for an APR of 14.60%. In this example, the borrower will receive $18,663 and will make 36 monthly payments of $643. Loan amounts range from $1,000 to $40,000 and loan term lengths range from 24 months to 60 months. Some amounts, rates, and term lengths may be unavailable in certain states.

For Personal Loans, APR ranges from 9.57% to 35.99% and origination fee ranges from 3.00% to 8.00% of the loan amount. APRs and origination fees are determined at the time of application. Lowest APR is available to borrowers with excellent credit. Advertised rates and fees are valid as of July 11, 2024 and are subject to change without notice.

Checking a rate through us generates a soft credit inquiry on a person’s credit report, which is visible only to that person. A hard credit inquiry, which is visible to that person and others, and which may affect that person’s credit score, only appears on the person’s credit report if and when a loan is issued to the person. Credit eligibility is not guaranteed. APR and other credit terms depend upon credit score and other key financing characteristics, including but not limited to the amount financed, loan term length, and credit usage and history.  

Unless otherwise specified, all credit and deposit products are provided by LendingClub Bank, N.A., Member FDIC, Equal Housing Lender (“LendingClub Bank”), a wholly-owned subsidiary of LendingClub Corporation, NMLS ID 167439. Credit products are subject to credit approval and may be subject to sufficient investor commitment. ​Deposit accounts are subject to approval. Only deposit products are FDIC insured.

“LendingClub” and the “LC” symbol are trademarks of LendingClub Bank.

© 2024 LendingClub Bank. All rights reserved.