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5 Cs of credit

What are the 5 Cs of credit?

What are the 5 Cs of credit? This term refers to a group of factors that impact your credit, and therefore your ability to secure a loan or a mortgage. The 5 Cs discuss a person’s capacity, capital, character, collateral, and credit. If you’re applying for a mortgage, you should be familiar with what each of these words mean, and how they affect you. Here’s what you need to know!


Capacity is the ability of borrowers to repay loans, and it is the most critical of the five Cs. We can assess debt-paying ability by evaluating the debt service ratios and payment histories on existing credit relationships. For example, lenders will look at your debt-to-income ratio, which compares your monthly income to your monthly expenses and presents it as a percentage. The lower your ratio, the better, because it means your debts take up a smaller proportion of your income. In general, DTI ratios below 35 per cent are more likely to satisfy a lender’s requirements, but all lenders have their own guidelines. 

If your capacity to deal with debt is in question, it’s important to lower your debt levels, or raise your income, to shrink your DTI ratio. Be sure to make consistent and timely bill payments, and always pay at least the minimum amount required. Alternatively, you can seek out higher-paying employment. However, sometimes lenders don’t want to work with someone who is entering a new, unpredictable position, so changing jobs could potentially set your approval back. 


Next, we have capital. This is the amount of money borrowers have invested in the property. Usually, this means a down payment, and lenders want to know how big of a down payment a borrower is contributing to their purchase. Depending on the purchase price of the property, of course, down payment requirements can range from five to 20 per cent or more. It’s important that a borrower’s capital comes from their own sources to prove they are capable of making this investment. In short, lenders want to see that borrowers are committing their own capital, and they will check the capital’s sources. 


Collateral is a guarantee in the form of additional security that can be provided to the lender. For mortgages, collateral is the property itself. Collateral is important to lenders because they want to minimize the risk of financing a mortgage. If they have this guarantee of your property as collateral, this acts as a backup in case you were to default on your mortgage at any point. A loan with collateral is sometimes called a secured loan, meaning the lender has an extra layer of protection. This can often help a borrower secure lower interest rates.


Credit is all about a borrower’s credit history, and more specifically, their repayment history.  This means lenders will look at credit reports to understand a person’s borrowing and repayment habits. Examining these items allows lenders to determine how a borrower might behave if they were to receive financing.

If your credit history has some spotty areas where you struggled to make repayments, this can affect your ability to qualify for further financing. In this case, it’s a good idea to take some time to establish a consistent pattern of reliable repayments. This will help lenders understand your current habits and your ability to repay loans.


The last of the 5 Cs of credit is character. Character is the general impression of how trustworthy borrowers are to repay the loans. Assessing length of employment, propensity to save, and responsible credit utilization all help to establish character. Character takes into account pieces from the other four Cs of credit to create a comprehensive picture of you as a borrower. Lenders will use your debts, payment habits, and previous loans to establish your character.

The 5 Cs of credit are a big part of how lenders make their decisions on an individual’s mortgage application. With that in mind, it’s important to fine tune your credit traits to ensure you can present the best version of yourself. You can reach out to us if you’re looking for guidance while you embark on this journey!

If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.