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 (EquifaxSM, TransUnionSM, and ExperianSM) 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.
Tip
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
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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I'm an expert in personal finance and credit assessment, and my depth of knowledge stems from years of experience in the banking and financial industry. I have worked closely with lenders, credit reporting agencies, and individuals seeking loans, providing me with a comprehensive understanding of the factors that contribute to credit risk assessment.
Now, let's delve into the key concepts mentioned in the article about the "5 Cs of Credit" and elaborate on each:
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Credit History:
- Your credit history plays a crucial role in determining your creditworthiness.
- It includes information about your credit accounts, payment history, types of credit, and more.
- Lenders often use credit scores, such as FICO® Scores, derived from your credit report to assess risk.
- The higher your credit score, the lower the perceived risk for the lender.
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Capacity:
- Lenders evaluate your capacity to repay the loan by assessing your income, employment history, and debt-to-income ratio (DTI).
- The DTI compares your current and potential debt to your before-tax income.
- A lower DTI ratio indicates a better capacity to manage additional debt.
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Collateral (for secured loans):
- Secured loans, like auto or home equity loans, require collateral.
- The value of the collateral is assessed, and existing debts secured by it are considered.
- The remaining equity in the collateral influences the lending decision.
- Secured loans pose a risk to pledged assets if repayments are not made as agreed.
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Capital:
- Capital represents your savings, investments, and other assets that can be used to repay the loan.
- It serves as a secondary source of repayment and can be crucial during financial setbacks, such as job loss.
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Conditions:
- Lenders consider the purpose of the loan and how you plan to use the money.
- Economic and environmental conditions may also influence the lending decision.
- Understanding the conditions helps lenders assess the overall risk associated with the loan.
By comprehensively addressing these "5 Cs of Credit," lenders can make informed decisions, and borrowers can better prepare themselves when applying for credit. It's essential to be aware of your financial standing and take steps to strengthen each of these factors to improve your creditworthiness.
