Five C’s of Credit

The Five C’s of Credit

My career has spanned both personal finance and corporate finance.  It even included a six year stint in banking.  If you’ve been following Paula Cashflow’s journey, then you already know I’m big on takeaways.  A takeaway is something that you learn from a particular situation, person or experience that could create future value in your life.

My takeaway from my banking days is understanding and embracing the Five C’s of Credit.  Although lenders use these dimensions to measure a businesses’ ability to pay back loans, it also has merit for evaluating our own relationship with debt.  More specifically, credit card debt.

Here are the Five C’s of Credit:


Character is a subjective measure of both the borrower’s willingness and ability to repay debt.  Although the definition implies that the lender’s character is not in question, we know from the financial crisis that mortgage lenders took advantage of many borrowers by lending excessively beyond their ability to service the debt.  This put folks into homes they would normally never be able to afford.  In my opinion, the lender failed the “Character” test.  Unfortunately, the borrower still wears the responsibility for servicing the debt and having strong Character will be beneficial when access to credit becomes necessary.

Paula Cashflow takeaway:  Do your own due diligence on how much debt you can afford.  Don’t let others (banks, credit card companies, paydays, etc.) make that decision for you.   Remember my house hunting experience.  Let this guide you to keep your credit card debt in check and manageable.  Shred the credit card offers that overstuff your mailbox.


Capital is  an objective measure of a borrower’s net worth or business value.  What does your Personal Financial Statement (“PFS”) reveal about your credit card debts?  Is your net worth positive or negative?

Paula Cashflow takeaway:  Keep your PFS up to date by performing the three month financial checklist.  Implement a plan to reduce/eliminate revolving credit card debt and stick to it.


Capacity is the ability to repay debts.  It can be measured by using your employment record, years of service on the job, and income when compared to expenses.  For example, if you’re overextended on credit card debt, your “capacity” to service that new car loan or new home loan may be diminished.

Paula Cashflow takeaway:  make credit card debt the smallest component of your overall debt and make sure it’s declining on a monthly basis.  This frees up “capacity” for future debt needs, i.e. a manageable mortgage.


Conditions represent subjective measures of the overall economic environment.  I noticed that during the financial crisis, my mailbox wasn’t as stuffed with credit card offers as compared to more prosperous times.  Other conditions could include job security, length of employment, length of residency, etc.

Paula Cashflow takeaway:  strong personal stability can override uncertain economic times when in need of capital (debt).


Collateral is something of value that is pledged to secure the loan or debt balance.  We all know that credit card debts are mostly unsecured.  This means that there is no collateral that can be liquidated to pay off the unpaid debt.  It’s both a curse and a blessing.  The downside is that not paying promptly or defaulting on the debt wreaks havoc on our credit scores.

Paula Cashflow takeaway:  Know your credit score.  “Credit score” is the new “Collateral”.  Nurture your credit score.  You can do this by managing credit card debt responsibly by:  a) paying existing balances off; and b) getting into the habit of paying off new credit card balances in full each month.

Make this year the year to incorporate the Five C’s of Credit into your wealth accumulation strategy.  Combining these dimensions with your Three Month checklist should better position you for financial freedom sooner rather than later.

Because, as you know, it’s about life and how you live it!

In the spirit of financial well-being,

Paula Cashflow












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