Personal Finance Cartoon Series: 5 Cs of Credit

5 Cs of Credit CartoonWhen you apply for credit (eg loan/mortage/line of credit/credit card) the bank wil measure your 5Cs of Credit.

5Cs of Credit in a nutshell (no, there is no “C”uteness)

  • Capacity
    Measures if you’re borrowing too much or not. It measures the amount of debt and income you have. Are you able to comfortably pay back all debts?
  • Capital
    Measures your savings, investments, and other assets that can help you pay back the loan.
  • Character
    Measures your track record with debt.  Your credit score is checked.  Your credit score is mainly determined by your credit history which show if there’s anything outstanding that went to collection or if you are slow at paying back or frequently skip payments. Check your credit history periodically to make sure you haven’t forgotten about anything.
  • Collateral
    This is like a backup if you end up failing to pay the loan – eg for a car loan your car is the security. The banks can take your car.
  • Conditions
    Lenders want to know why you are borrowing. A lender may be more likely to approve a loan with a specific purpose like for a house (mortgage) or a car, rather than for a loan that can be used for anything.

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