What are the five "C's" of credit?

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durbanville eNotes educator| Certified Educator

Credit is very much a part of modern living and , whilst it allows adults to plan and purchase, it is also  a problem when companies lend money unscrupulously or buyers over- extend themselves.

Amongst the very honest people who use credit as it was  intended to be and let it support a stable financial picture, there are those who, despite knowing that they will not qualify or who have previously mismanaged credit, will keep trying.

Anyone who wants to borrow has to be assessed and their risk weighted. previous history is important and the "Five C's " are the elements that make a borrower a good risk:

  • Character in the form of integrity is mandatory to avoid dishonest borrowers.
  • Capacity means having a cash flow that will allow that borrower to repay their loan without difficulty.
  • Capital reflects the net worth of a borrower and indicates that a borrower operates within a stable financial environment
  • Collateral may be needed for large amounts as a means of securing a loan
  • Conditions must be taken into consideration, depending on what the money is for and whether it would be a good purchase based on the stability of the sector in which the borrower works and the overall economy .

Of course, it's not possible to make accurate assessments of everyone and economic conditions can negatively affect those with the best intentions. Credit companies have instituted regulations to protect people in such times to make the borrowing function a normal and acceptable means of purchasing.