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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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
Called the five Cs of credit, they include capacity, capital, conditions, character, and collateral. There is no regulatory standard that requires the use of the five Cs of credit, but the majority of lenders review most of this information prior to allowing a borrower to take on debt.
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? ›
Each of the five Cs has its own value, and each should be considered important. Some lenders may carry more weight for categories than others based on prevailing circ*mstances. Character and capacity are often most important for determining whether a lender will extend credit.
Which of the 5 Cs of credit would a lender use to determine if a potential borrower can afford the debt payment? ›
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.
Which of the 5 Cs of credit are lenders primarily assessed by examining your credit report? ›
1. Character. In a financial context, the term “character” pertains to your reliability and trustworthiness. It's primarily gauged through a detailed examination of your personal credit history and credit score.
What are the 5 Cs of credit standards? ›
Called the five Cs of credit, they include capacity, capital, conditions, character, and collateral.
What are the 5 Cs of credit quizlet? ›
Collateral, Credit History, Capacity, Capital, Character. What if you do not repay the loan? What assets do you have to secure the loan? What is your credit history?
What are the 5 Cs of a good loan? ›
The lender will typically follow what is called the Five Cs of Credit: Character, Capacity, Capital, Collateral and Conditions. Examining each of these things helps the lender determine the level of risk associated with providing the borrower with the requested funds.
Which of the 5 Cs is most important? ›
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 is the 5c principle of lending? ›
The 5 C's of credit are character, capacity, capital, collateral and conditions. When you apply for a loan, mortgage or credit card, the lender will want to know you can pay back the money as agreed. Lenders will look at your creditworthiness, or how you've managed debt and whether you can take on more.
What scoring model is used when applying for mortgage applications? Lenders will look at your FICO score when reviewing your mortgage application. It is, by far, the scoring model lenders use most.
What are the 5 Cs of bad credit? ›
They are the five characteristics that lenders look for when assessing someone's creditworthiness—character, capacity, capital, collateral, and conditions. They are essential in determining whether an individual qualifies for loan approval as well as what terms may be offered with any given loan agreement.
How do lenders and investors use the 5 Cs of credit when evaluating a request for financing? ›
Lenders use the 5 Cs of credit analysis to assess the level of risk associated with lending to a particular business. By evaluating a borrower's character, capacity, capital, collateral, and conditions, lenders can determine the likelihood of the borrower repaying the loan on time and in full.
What is the most subjective segment of the 5 Cs of credit for giving final approval? ›
Expert-Verified Answer
The most subjective and also significant segment of the 5 Cs of credit for giving final approval is the Character segment. The 5 Cs of credit are character, capacity, capital, collateral, and conditions, and they are used by lenders to evaluate a borrower's creditworthiness.
Which is not part of the 5 Cs of the credit decision? ›
Candor is not part of the 5cs' of credit.
What are the 5 categories used to give a borrower their FICO score? ›
What's in my FICO® Scores? FICO Scores are calculated using many different pieces of credit data in your credit report. This data is grouped into five categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%).
What are the 5 P's of credit? ›
Different models such as the 5C's of credit (Character, Capacity, Capital, Collateral and Conditions); the 5P's (Person, Payment, Principal, Purpose and Protection), the LAPP (Liquidity, Activity, Profitability and Potential), the CAMPARI (Character, Ability, Margin, Purpose, Amount, Repayment and Insurance) model and ...
What are the 5C conditions? ›
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 are the five Cs that banks consider when loaning money to a business? ›
Lenders just want assurance that potential business borrowers are a safe and smart place to “invest” their loan dollars. One way to look at this is by becoming familiar with the “Five C's of Credit” (character, capacity, capital, conditions, and collateral.)
