What Do Diamonds And Credit Have In Common?


Most of us know the 5 Cs of diamond quality:

Colour, Clarity, Cut, Carat and Certification.

But there is another set of Cs that are more valuable than diamonds

They are the 5 Cs of creditworthiness.

Creditworthiness is an assessment conducted by a lender (creditor) in order to determine the likelihood of a borrower defaulting on a loan

Lenders will use the following 5 Cs to determine your creditworthiness.

  1. CHARACTER: The lender will look at how you handled credit in the past e.g. were you late with payments; do you jump around, changing jobs and residences every few months; how long have you been at your current job/field. They would also look at how you save. Do you have a habit of saving as opposed to spending all of your available credit.

  2. CAPACITY: Will you be able to repay the loan? This is the question that the lender would want answered when they look at your payment history, the type of credit you acquired and your debt service ratio (the percentage of your monthly income that is spent on debt repayment).

  3. CAPITAL: This is the amount of money that the borrower is willing to risk towards the purpose of the loan. E.g. if you are seeking a mortgage to buy a house, your capital would be your down payment. With the borrower having capital, it means that the lender is not the only one taking on the risk of the purchase of the house. This also applies for regular personal loans.

  4. COLLATERAL: This is a security that the lender uses in case the borrower defaults on the loan. Some examples of collateral are:

    -for a mortgage, the property would be collateral

    -if the borrower has investments, the lender can use that as a security for a loan of a lesser value.

    -sometimes the lender may ask for a guarantor or co-signer for a loan - this is also a type of collateral since should the borrower be unable to pay, the guarantor becomes liable.

  5. CREDIT REPORT AND SCORE: This bears the most weight of all the Cs. By looking at your credit report and score, lenders can tell not only your likelihood to repay your loan but can see how you have dealt with other lenders in the past. They can see if you had debt that went to collections or if you had to seek legal or non-legal assistance (e.g. bankruptcy, debt management assistance etc.) to meet your obligation of repaying your creditors.

Your credit report will also show the lender your Bankruptcy Index Score which tells them the likelihood of you filing for bankruptcy.


Like the 5 Cs of diamond quality, knowing your 5 Cs of creditworthiness can be invaluable information. Do you know where you stand with your 5 Cs.


Pamela George is a Financial Literacy and Credit Counsellor whose main goal is to help her clients stop stressing about money and to start living their dreams. Prior to starting her own business, Pamela worked as a Credit Counsellor for a credit counseling agency and as a Financial Aid Officer with a post-secondary institution. Pamela is an Accredited Financial Counsellor of Canada (AFCC) and a member of the Association of Financial Counselling, Planning and Education (AFCPE). Pamela gives her clients the support and skills they need to break out of debt, learn to control their financial futures, and give themselves and their children the lives they deserve.

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