Which five categories comprise the five Cs of credit used in underwriting decisions?

• A. Character, Capacity, Capital, Collateral, and Conditions
• B. Character, Capacity, Capital, Collateral, and Compliance
• C. Character, Competence, Capital, Collateral, and Conditions
• D. Character, Capacity, Capital, Collateral, and Circumstances

Answer: (A)

The five Cs of credit are the framework lenders use to evaluate risk in underwriting: Character, Capacity, Capital, Collateral, and Conditions. Character covers the borrower's trustworthiness and history of repaying debts. Capacity assesses the ability to repay based on income, job stability, and existing obligations—often through metrics like debt-to-income. Capital looks at the borrower's financial reserves and the equity or down payment they contribute, which shows commitment and reduces risk. Collateral is the asset pledged to secure the loan, giving the lender a way to recover if repayment falters. Conditions consider external factors that could affect repayment, such as economic trends, industry health, and the loan’s purpose and terms.

Other options replace one of these standard categories with terms like compliance, competence, or circumstantial factors. Compliance, competence, or similar terms aren’t part of the traditional five Cs, while Conditions is the correct category that captures the impact of external factors. That’s why the set Character, Capacity, Capital, Collateral, and Conditions is the right answer.