What are the Three Cs of Credit?

Repairing our credit can seem like we’re playing a game we don’t know the rules of. In fact, how credit scores work remains a mystery to almost half of all Americans. So if you’ve felt in the dark, you’re not alone.

Helping people understand credit, how it works, and how it impacts our lives is something I’ve become very passionate about. After I wrote a piece about who and what the Three Credit Bureaus are, I had some questions from people about how the Credit Bureaus work. Here are the answers you’re looking for.

Character, Capital, Capacity

Those are the three Cs of credit. But what do they mean? When I wrote a piece about how to boost your credit by up to 100 points, I talked about credit usage, loan types, and late payments. I even broke down some of the percentages in explaining how to wipe your credit score.

But sometimes that can start getting confusing. And I’ll be clearing things up. So we’ll stick with the three Cs, because they’re easy to remember, and easy to understand.


In the old days of commerce, cave dwellers would go around to one another and ask favors. Say Ug was low on sabertooth fur. He could borrow some from Gu. Now, Gu knew Ug was a good guy, he’d pay back the fur. So he lends it out.

But in the modern world, we don’t have the luxury of going next door and asking our friends or family to “borrow” some credit. Maybe, if you’re lucky, you can borrow money. But a credit card? A car loan? Not so easy.

Instead we have to secure credit. And to do this we need to go to faceless institutions, or large banks, often over the internet, telephone, or through the mail, and submit applications for credit.

When we do that, though, the lenders go through a similar process as Gu: they determine if we have good enough character to lend to. Basically, are we good borrowers? 

There are a number of factors that go into our Credit Character, like how many accounts we’ve opened, how much time passed between opening accounts, and whether we pay our debts. I’ll write a checklist at the end of this article for how to inventory your character, but for now, know that it’s a bit part of your Credit.


I’m not talking about white buildings with dome roofs and impossible traffic. I’m talking about the “capital” in capitalism. Capital is, in its purest sense, the materials needed to produce something.

In business, capital is cash, lumber, trucks, property, and so forth. In personal Credit, Capital largely falls into three categories: cash; real estate; stocks/bonds.

When securing new credit, whether you know it or not, some part of your capital is already assessed. If your name is on any deeds or titles, that's a public record of your collateral. And unless you own stocks or bonds through a third party, your name is on record as having that capital, too.

There’s another C word that some people use instead of Capital, because it’s easier to understand–Collateral. The whole point of Capital, or collateral, is for the lender to determine how much in assets they can attempt to seize if you default on your loan. In home purchasing terms, Capital is also represented by how much cash you can bring to the table as a down payment. A downpayment actually takes money out of the bank’s pocket (because you’re not borrowing as much), but it makes you look better as a borrower.

In cave-person terms, they want to know how many mastodon tusks you have in case you can’t repay that fur.


The final C of Credit is Capacity, and it represents the creditors assessment of how capable we are of paying back a specific loan. This is why when applying for large loans, lenders ask us for pay stubs or checking account history.

They want to see that we have plenty of money coming in on a regular basis, compared to very little money going out. If we take out a loan that requires a $1,000 monthly payment, they want to see that we have at least that much extra money a month.

Back to the cave, your capacity is the ability to go kill another sabertooth to pay back that fur.

One Last Thing

In recent years, some financial writers and commentators have brought up other C words to help people understand how lenders are evaluating us. It makes sense. The more we know about how they’re calculating our scores, the better we can adjust those scores ourselves.

One C word that has come up that I’ll throw in is Conditions. Also referred to as context, it’s important to know that when Gu–I mean a bank–decides to offer loans, they’re doing it to make money. (Check my note at the end for how that works.) If a bank, auto finance company, or credit card firm can’t make money because of market conditions, they make it harder for regular people to borrow.

Conditions affect the middle and lower classes more. That’s one of the worst parts about the world of credit: it can seem impossible to get it unless you have it already. Just keep in mind that when interest rates go up, or when unemployment or inflation are high, money all around the market gets hard to find. That’s when lenders look at our Character, our Capital, and our Capacity with a closer lens, and when some of us lose out on a loan we really need.

How Lenders Make Money

In the world of Finance, there are lots of ways to make money, but the basic principle is the same as in any business: buy low, sell high. It works the same with cash as it does with oil.

Contrary to some popular belief, the Federal Reserve isn’t officially a part of the government. Instead, it works with the Treasury to limit or expand the amount of cash in the economy. They don’t always get it right, but their whole job is to keep the economy chugging along by making sure everyone has enough money–but not too much.

Cash comes into the economy like this. The Fed loans money out to qualified financial institutions at a rate none of us see except in headlines. Let’s call it 5%. Those financial institutions then lend the money out to other, smaller banks, and to consumers, at an interest rate just higher than 5%, say 6%. That way they can make a profit on the money they borrowed.

If you’re lucky enough to be a borrower in good standing, and borrowing enough money, you may be able to borrow directly from the company that borrowed from the Fed. For perspective, as of this writing the Fed Primary Rate was at 5.5%, and well qualified borrowers for large home amounts only had in increase of 0.15%, or a 5.65% mortgage.


Another C word, I know. But I’ll make this end bit easy to get through. Just use the checklists at the end of this section to see how your Character, Capital, and Capacity are shaping up. Follow the guidelines, check out my other articles, and keep your credit up!

Character Checklist

  • Do you have a lot of open credit accounts? A good mix is usually defined as two to three credit cards, an auto loan, personal or student loans, and a mortgage. Not too much more than that.
  • Is your credit card usage high? You want that at less than 30%.
  • Any late payments? Delinquencies? Charge offs? You’ll need to address those.
  • Foreclosures or bankruptcies? You may need to wait for these to fall off, but you should still build your credit in the meantime!

If you want help assessing your Credit Character, there are a number of Credit Repair Companies that offer free consultations.


  • Run a Budget Check–how much are you earning, how much are you spending.
  • Specifically, find out how much your total debt is–not rent, utilities, or anything else, just what you’ve borrowed.
  • Get your debt-to-income ratio at or below 35%.

Here’s a quick example. If I make $3,500 a month, and I pay a $100 credit card bill and a $250 car payment every month, and I have no other debt, my ratio is 10-to-1 ($3,500 to $350), or 10%.


  • Institute a savings plan–a jar on the table for spare change can even make a difference.
  • Make sure all valuables are insured–this is proof of worth in the credit world.
  • Document all owned assets–stocks, bonds, property.
  • Keep an updated ledger of all your asset worth, including cash.

One rule of thumb is that for the best mortgages and lowest insurance, lenders want to see a %20 down payment on a home loan. That’s outside the reach of many of us, but it’s a goal to keep in mind.

In all three Credit Cs, it can pay dividends to call a credit repair company, if for no other reason than their free consultations.

About the author Greg Lorenzo

Greg is a financial expert who has been advising his audience on loans for over 10 years. He has a wealth of knowledge and experience in the area, and he is passionate about helping people get the best possible deal on their loans. Greg is an expert in negotiating loans, and he has a proven track record of getting his clients the best possible terms. He is also a strong advocate for financial literacy, and he regularly gives workshops and seminars on the topic.

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