The 5 Cs of Your Credit


The 5Cs have long been used by lenders to evaluate the creditworthiness of both businesses and individuals. While they play a big part in the decision-making process, banks like Deerwood make their decisions based on more than these five factors. 

If you’re preparing to apply for a home loan in Minnesota or a business loan in Minnesota, knowing your creditworthiness will help you find a loan type, rate, and bank that is right for you and your financial situation.

Here’s a quick overview to get you acquainted with the 5 Cs of credit. 


Collateral is a form of security for the bank and is defined by what you own and can pledge as a type of insurance for the loan. Lenders evaluate these assets that can support your repayment. While cash is always the primary source of repayment for a loan, pledged assets can offer a secondary source. These assets typically include land, equipment, and vehicles. Loans that you have against any of these assets will be deducted from your collateral total.


While capacity has long been defined as your ability to repay the loan, today it has become known as cash flow. Cash flow has become the most critical metric lenders use in the evaluation process. 

When a lender evaluates your cash flow, they’ll begin by evaluating your financial statements and tax returns. They’ll review debt-to-income ratio and past payment history, to determine the probability that you’ll successfully repay the loan. 


Character is the overall impression you make on the lender. It’s true, character is subjective, which is why having a relationship with your personal banker is so important. Background, experience, reputation, and personal credit all play a part in a lender’s assessment of character. Not unlike other businesses, lenders are interested in working with individuals who are forthright, honest and have a solid track record. The past eight years have proven that even the best laid plans can fall through and people can fall on hard times. People that have relationships with their bankers can more often find solutions to be resilient during trials.


Like we mentioned with collateral, cash is always the best indication of the ability to repay a loan. Capital refers to the savings, investments and other assets that can help you repay the loan. These are assets that are liquid and do not have loans against them. 


The conditions of a loan include things like the rate, terms, and amount of principal. Lenders look at these factors and how they affect your ability to repay the loan. If conditions are unfavorable, lenders will often require you to compensate with more capital or collateral.

Evaluating your creditworthiness is not one-dimensional, and while these 5Cs are important, the exceptional banks will make lending decisions based on more than just these factors. By knowing where you stand with these factors, you and your lender can take the steps needed to position you for future success.


Rachel Carpenter close up

Rachel Carpenter

Office: 218.825.8946

Rachel Carpenter is Vice President of Retail Banking at Deerwood Bank. She graduated from Southwest Minnesota State University with a bachelors degree in Business Management. Rachel was nominated Class President of the 2019 graduating class of the Minnesota Bankers Leadership Academy and currently sits on an Emerging Leaders subcommittee for the American Bankers Association. When Rachel gets a free moment, she is an avid mountain biker and skier with her husband, Mike and sons Gavin and Logan.

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