Your credit score is a measure of factors that may affect your ability to repay credit. It’s a complex formula that takes into account how you’ve repaid previous loans, any outstanding debt, and your current salary.
A credit score is dynamic and can change positively or negatively depending upon how much debt you accrue and how you manage your bills. The factors that determine your credit score are called The Three C’s of Credit – Character, Capital and Capacity.
Character:
From your credit history, a lender may decide whether you possess the honesty and reliability to repay a debt. Considerations may include:
- Have you used credit before?
- Do you pay your bills on time?
- How long have you lived at your present address?
- How long have you been at your present job?
Capital:
A lender will want to know if you have valuable assets such as real estate, personal property, investments, or savings with which to repay debt if income is unavailable.
Capacity:
This refers to your ability to repay the debt. The lender will look to see if you have been working regularly in an occupation that is likely to provide enough income to support your credit use.
The following questions may help the lender determine this:
- What is your current salary?
- How many other loan payments do you have?
- What are your current living expenses?
- What are your current debts?
- How many dependents do you have?
FAQs
The term “3 Cs of credit” was popularised in the 1960s, but the principles behind the concept date back much further. The three C's are Character, Capacity and Collateral, and today they remain a widely accepted framework for evaluating creditworthiness, used globally by banks, credit unions and lenders of all types.
What are the 3 Cs in credit? ›
The factors that determine your credit score are called The Three C's of Credit – Character, Capital and Capacity.
What are the three Cs of credit according to the workbook? ›
For example, when it comes to actually applying for credit, the “three C's” of credit – capital, capacity, and character – are crucial.
What are 5cs of credit? ›
The five Cs of credit are character, capacity, capital, collateral, and conditions.
What are the 5 Cs of mortgage 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).
Are there 3 types of credit? ›
The three common types of credit—revolving, open-end and installment—can work differently when it comes to how you borrow and pay back the funds. And when you have a diverse portfolio of credit that you manage responsibly, you can improve your credit mix, which could boost your credit scores.
What are the 5 Cs of credit CFA? ›
The 5 Cs are Character, Capacity, Capital, Conditions, and Collateral. Lenders evaluate your character by looking at your credit history and credit score. They want to see that you make payments on time and have a plan to pay your bills.
Which is the most important C of the five Cs of credit? ›
Bottom Line Up Front. 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 5 Cs of learning? ›
A core element of SCSD's Strategic Plan is a focus on the skills and conceptual tools that are critical for 21st Century learners, including the 5Cs: Critical Thinking & Problem Solving, Communication, Collaboration, Citizenship (global and local) and Creativity & Innovation.
What are the 5cs of commercial lending? ›
The 5 Cs—character, capacity, capital, collateral, and conditions—are the linchpin to a successful loan application.
They are noninstallment, installment, and revolving open-end credit. Under what conditions might a consumer find each type useful? example, for buying gas regularly.
What are the three C's of real estate? ›
These three essential factors — Credit, Capacity, and Collateral — play a pivotal role in determining your eligibility and terms for a mortgage. Let's delve into each of these C's to unravel the secrets to a successful mortgage application.
What are the 3 primary types of credit that makes up your credit diversity portion of your credit score? ›
Credit cards (revolving) Home equity line of credit (revolving) Student loans (installment)
Which is not one of the 3 Cs involved in your credit score? ›
Collateral is not one of the three C's of credit. The three C's of credit are character, capacity, and capital. These factors help lenders to assess the creditworthiness of potential borrowers. Character refers to a borrower's credit history and reputation for paying bills on time.
