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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Products to Consider
- Credit Cards
- Personal Loans
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
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 5 C's of credit risk to decide if you are loan worthy? ›
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 C's is the most important in lending decisions? ›
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 are the five C's lenders consider when approving a loan? ›
The five Cs of credit are important because lenders use these factors to determine whether to approve you for a financial product. Lenders also use these five Cs—character, capacity, capital, collateral, and conditions—to set your loan rates and loan terms.
Which answer lists the 5 C's that determine credit worthiness? ›
Character, capacity, capital, collateral and conditions are the 5 C's of credit. Lenders may look at the 5 C's when considering credit applications. Understanding the 5 C's could help you boost your creditworthiness, making it easier to qualify for the credit you apply for.
What do lenders look at when applying for a loan? ›
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.
What do lenders use to determine who qualifies for a loan? ›
Credit criteria are the various factors that lenders use to decide whether to approve someone's application for a new loan. Although the criteria can vary from lender to lender, most will consider such factors as an applicant's income, existing debts, and payment history.
What is the 5 Cs of lending? ›
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.
What are the 5 Cs of lending principles? ›
The five Cs of credit are character, capacity, capital, collateral, and conditions.
What are the 5 Cs of credit underwriting? ›
The Underwriting Process of a Loan Application
One of the first things all lenders learn and use to make loan decisions are the “Five C's of Credit": Character, Conditions, Capital, Capacity, and Collateral. These are the criteria your prospective lender uses to determine whether to make you a loan (and on what terms).
Underwriting standards for credit cards generally include: Identification and assessment of the applicant's repayment willingness and capacity, including consideration of credit history and performance on past and existing obligations.
What habit lowers your credit score? ›
Actions that can lower your credit score include late or missed payments, high credit utilization, too many applications for credit and more. Experian, TransUnion and Equifax now offer all U.S. consumers free weekly credit reports through AnnualCreditReport.com.
Which of the 5 Cs of credit help determine the ability to repay a loan based upon incoming and outgoing cash flow? ›
Capacity. Also known as cash flow, capacity determines a borrower's ability to repay debt. In essence, capacity focuses on whether the investment can generate enough cash flow to repay overall debt. Capacity can sometimes be called the Primary Source of Repayment.
How do lenders determine the credit risk of a person? ›
Credit risk is determined by various financial factors, including credit scores and debt-to-income (DTI) ratio. The lower risk a borrower is determined to be, the lower the interest rate and more favorable the terms they might be offered on a loan.
What are the 5 major factors that these companies use to determine a credit score? ›
Knowing how credit scores are calculated can help you boost your standing if you pay close attention to these five criteria:
- Payment history.
- Amounts owed.
- Length of credit history.
- New credit.
- Credit mix.
A FICO credit score is calculated based on five factors: your payment history, amount owed, new credit, length of credit history, and credit mix. Your record of on-time payments and amount of credit you've used are the two top factors. Applying for new credit can temporarily lower your score.
What are the 5cs of credit risk? ›
The 5 Cs are Character, Capacity, Capital, Collateral, and Conditions. The 5 Cs are factored into most lenders' risk rating and pricing models to support effective loan structures and mitigate credit risk.
What are the 5 Cs of underwriting? ›
The Underwriting Process of a Loan Application
One of the first things all lenders learn and use to make loan decisions are the “Five C's of Credit": Character, Conditions, Capital, Capacity, and Collateral. These are the criteria your prospective lender uses to determine whether to make you a loan (and on what terms).
What are the 5 Cs of the credit decision Quizlet? ›
- 5 C's or Credit. Collateral, Credit History, Capacity, Capital, Character.
- Collateral. What if you do not repay the loan? ...
- Credit History. What is your credit history? ...
- Capital. What are your assets? ...
- Capacity. Can you repay the loan? ...
- Character. Will you repay your loan? ...
- Default Payment Clause. . ...
- Security Interest.
