Which list correctly names all five traditional C's of credit?

• A. Character, Capital, Capacity, Conditions, and Collateral
• B. Character, Capital, Capacity, Credit history, and Collateral
• C. Character, Capital, Cash Flow, Conditions, and Collateral
• D. Character, Capital, Capacity, Conditions, and Compliance

Answer: (A)

Understanding the five traditional C's of credit helps you evaluate risk when deciding whether to lend. The five are Character, Capital, Capacity, Conditions, and Collateral. Character refers to the borrower's trustworthiness and track record of repayment—things like reliability, honesty, and past behavior with debt. Capital looks at the borrower's own financial stake in the venture, showing the lender that the borrower has something to lose if the loan isn’t repaid. Capacity is about the borrower's ability to repay from expected cash flows, typically assessed through income, existing obligations, and debt-service coverage. Conditions consider external factors that could affect repayment, such as economic climate, industry trends, and how the loan will be used. Collateral is assets pledged to secure the loan, giving the lender a source of recovery if the borrower defaults. The list in question matches these five concepts exactly, while other options mix in terms like credit history, cash flow, or compliance, which are related but are not part of the traditional five C's.