Five Cs Of Credit

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DEFINITION of 'Five Cs Of Credit'

A method used by lenders to determine the credit worthiness of potential borrowers. The system weighs five characteristics of the borrower, attempting to gauge the chance of default.

The five Cs of credit are:

-Character
-Capacity
-Capital
-Collateral
-Conditions

INVESTOPEDIA EXPLAINS 'Five Cs Of Credit'

This method of evaluating a borrower incorporates both qualitative and quantitative measures. The first factor is character, which refers to a borrower's reputation. Capacity measures a borrower's ability to repay a loan by comparing income against recurring debts. The lender will consider any capital the borrower puts toward a potential investment, because a large contribution by the borrower will lessen the chance of default. Collateral, such as property or large assets, helps to secure the loan. Finally, the conditions of the loan, such as the interest rate and amount of principal, will influence the lender's desire to finance the borrower.

For more on the five Cs, check out "Why do banks use the Five Cs of Credit to determine a borrower's credit worthiness?"

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RELATED FAQS
  1. Why do banks use the Five Cs of Credit to determine a borrower's credit worthiness?

    Banks use rigorous policies and analyses when determining if and how much money to lend to clients. The methods used by banks ... Read Full Answer >>
  2. Do all banks use the Five Cs of Credit when evaluating potential borrowers?

    Both individual and business borrowers are asked to provide information related to their credit history, income and debt ... Read Full Answer >>
  3. What is the most important "C" in the Five Cs of Credit?

    Financial institutions attempt to mitigate the risk of lending to unworthy borrowers by performing a credit analysis on individuals ... Read Full Answer >>
  4. How do banks measure the Five Cs of Credit?

    The five C's of credit is a valuable tool used by banks to determine a borrower's creditworthiness. Credit analysts developed ... Read Full Answer >>
  5. What is the difference between the Five Cs of Credit and credit rating?

    The five C's of credit comprise a list of factors used by lenders to predict the probability of a borrower defaulting on ... Read Full Answer >>
  6. Why do commercial banks borrow from the Federal Reserve?

    Commercial banks borrow from the Federal Reserve primarily to meet reserve requirements when their cash on hand is low before ... Read Full Answer >>
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