Two Inevitable C’s Of Credit: Character And Capacity

Two Inevitable C’s Of Credit: Character And Capacity

Being credit healthy is the state of being in the pink of health – not your physical or mental health, but your credit health

Credit assessment is a complex process. The five crucial Cs of credit, used by lenders to gauge the creditworthiness of potential borrowers are – Character, Capacity, Capital, Collateral and Conditions. Of these, the first two are of high significance.  Let us focus on the two main factors – Character and Capacity: 


Character refers to credit history, which is basically the reputation of the individual, in accordance to his/her previous records while dealing with financial institutions. Your credit history includes the different kinds of loans, credit cards and credit facilities you have taken so far. The credit history will divulge enough information that will indicate whether the individual is responsible is dealing with his finances or not.  

Regular repayment of loans, credit cards and other bills indicate that the person is responsible with his money and understands the importance of timely repayment. Hence, he can come out as an honest and reliable person to repay a debt.  

On the other hand, if he defaults or is irregular in paying his EMIs, he is tagged as irresponsible in his credit report. Such a person has a very high chance of missing out on the benefits of a good credit score, like lower interest rates on loans, easier and faster approval on loans and credit cards, telephone connection, job prospects, insurance premia, rentals and a lot more.  

The better your credit score or credit history, the more favorable you will be considered in the lender’s point of view. A good credit history lowers the risk that you will default on your new loan.


The second important factor is capacity of the individual. Capacity measures a borrower’s ability to repay a loan by comparing income against recurring debts. Underwriters commonly use a ratio called the debt-to-income ratio or the DTI ratio to compute this factor. The DTI ratio is simply your total debt divided by your total income. A lower DTI ratio indicates that a smaller percentage of your income is going towards repaying your current debt. This means you have greater financial capacity to take on new debts. The lower an applicant’s DTI, the better the chance of qualifying for a new loan.

Now that you are aware of the two main criteria, let us quickly run through the other three

Capital: Lenders also consider any capital that the borrower puts toward a potential investment. In other words, it is the down payment that you make on the loan you intend to avail. 

Collateral: An asset pledged with a lending institution against a loan is called Collateral. A loan secured by Collateral (called secured lending) carries a lower risk than one without Collateral (called unsecured lending).

Condition: This is a broader category that encompasses several factors- the terms and conditions of the loan, such as the repayment tenure, the amount to be borrowed, and so on. 

A credit score is a numerical measure of a person’s creditworthiness. It is a 3-digit number that ranges from 300 to 900. A score of 750 and above is considered to be a good score. If your credit score is not up to the mark, you could take measures to improve it or you could avail the services of a reliable credit improvement company.  

Being credit healthy is essential for one’s financial wellbeing. Sticking to good financial practices will make you a credit-healthy person. 

Credit Triangle is a one-stop solution for all your credit and finance needs. We help you with credit health management, repair and improvement.