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How to Use the 5 C’s of Credit to Your Advantage

How to Use the 5 C’s of Credit to Your Advantage

Whether you’re trying to get a business loan or a loan for personal reasons, the 5 C’s of credit will impact your ability to get a loan and possibly the terms and interest rate. The first 3 c’s of credit relate to you as the borrower, while the other two c’s are more affected by the loan’s specifics. Find out what the 5 C’s of credit are and how you can use them to your advantage to get the most desirable loan for your situation.

What Are the 5 C’s of Credit?

The 5 C’s of credit are capacity, character, capital, collateral, and conditions. They are characteristics used to determine your creditworthiness. And to estimate the risk of loss to the lender, essentially, they try to predict the chances that the borrower will default on a loan.

Each lender measures the 5 C’s differently and will attach importance to each characteristic differently depending on their lending practices. But most lenders usually put the most importance on capacity.

Let’s dive into the specifics of each, starting with the most emphasized capacity.


Capacity measures the borrower’s ability to repay their loans. It considers current income and debt levels.

Lenders calculate a debt-to-income ratio to help them determine capacity. A debt-to-income ratio takes your monthly debt payments and divides them by your monthly gross (pre-tax) income. The lower your debt-to-income ratio, the greater your chances of getting a loan (with favourable terms and rates).

The higher your debt-to-income ratio, the higher your risk of defaulting on a loan. Therefore, the higher risk to the lender. Most lenders prefer a debt-to-income ratio of 35% or lower. And some may be prohibited from lending to you if your debt-to-income ratio is higher than a certain threshold.

But capacity isn’t only about the numbers. It also includes the length of time you have been employed at your current employer and your future job stability.

Capacity ensures that the borrower has the ability to repay their loans for the proposed amounts at the proposed terms. For business loans, capacity looks at the business’s ability to generate cash flow to service the loans.


Character is a measure of the borrower’s general trustworthiness. It includes reviewing your credit history to represent your reputation or track record of paying off your debts.

The higher your credit score, the more likely you will be approved for a loan. And potentially, the lower your interest rate will be. Some lenders may even have minimum credit scores for approval of loans.

The information on your credit report is vital for this one of the 5’s of credit. That is why it is important to review your credit report annually. You wouldn’t want an error to affect your ability to borrow money in the future.

A lender may do a personal interview or check employment or character references when assessing a borrower’s character.


Capital is the amount of money the borrower has or puts toward the loan (in the form of a down payment). The more money the borrower has involved with the loan, the less likely they will default. 

A downpayment can indicate a borrower’s level of commitment or seriousness of repaying the loan. The higher the downpayment, the better the terms and rates usually are. If you have more money involved, your sense of ownership is greater.

When lenders review your capital, they may look at your savings and investment account balances. They are looking to see if you have additional means to repay your loans other than your regular income.

Unlike some of the other 5 C’s of credit, capital is usually measured quantitatively as a percentage.


Collateral is the asset or assets that the borrower uses to back the loan. These assets act as an extra level of security for the lender. If you default on the loan, the lender can claim (or repossess) the asset to recoup some of their costs.

Often the object you are seeking the loan for acts as the collateral. For example, with a mortgage, the home is the collateral, and for a car loan, the vehicle is. If you stop making payments on the loan or default altogether, the lender can take ownership of the asset depending on the specific situation.

The value of the collateral is measured in part by how liquid the asset is. Cash is the best collateral in this sense.

If there is collateral for the loan, the loan is considered to be a secure loan. Therefore, secured loans are less risky and often come with better terms and lower interest rates than unsecured loans.


Conditions are a characteristic of the 5 C’s of credit that considers the loan details (not just the borrower). It looks at the loan’s purpose, principal amount, length of time to repay the loan (amortization), and the interest rate.

Lenders want to know and assess the need of the borrower for taking on the debt. And are more willing to lend if the loan has a purpose, for example, a home renovation or RRSP loan for personal loans or equipment or expansion loans for business loans.

The lender may also consider conditions outside of the borrower’s control, such as the economy as a whole, industry trends, and potential legislative changes.

Conditions are the most subjective of the 5 C’s of credit and, therefore, evaluated the most qualitatively.

Tips to Take Advantage of the 5 C’s of Credit

In order the assure that you can get your desired loan at a favourable rate, here are a few ways you can use the 5 C’s of credit to your advantage:

  • Decrease your debt-to-income ratio
  • Ensure you have a clean credit history. Make a plan to review your credit report annually for errors and fraud.
  • Increase the downpayment or capital you have involved in the loan. Prove to the lender that you are serious by increasing the money you have involved.
  • Backing the loan with collateral. If you can request a secured loan by putting up collateral, lenders are more likely to lend to you.

Knowing how lenders judge your creditworthiness can help you prepare to get the most out of any lending situation.

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