What is creditworthiness?
Creditworthiness is an important financial topic because it impacts how credit lenders decide if you can get new credit.
Your creditworthiness also plays a big role in your credit score.
Because of this, you must understand what creditworthiness is, how to check your creditworthiness, and what you can do to improve your creditworthiness.
What Is Creditworthiness?
Credit lenders use creditworthiness to determine if you’re worthy of new credit or if you’ll default on your debt obligations. Creditors look at your creditworthiness before they approve you for new credit.
Your creditworthiness can be determined using several factors, including your credit score and repayment history.
In addition, some credit lending institutions will take your available assets and the number of liabilities you have into consideration when determining the probability of default.
Understanding What Creditworthiness Is
Creditors use your creditworthiness to determine if you’re a good fit for that credit card or loan application you’ve filled out.
Ultimately, what the creditor decides will be based on how you’ve handled your credit in the past. To figure this out, they’ll look at different factors, including your payment history, credit score, and credit report.
Payment History
Payment history is an important part of your creditworthiness. But unfortunately, credit lenders generally don’t give credit to anyone with a history of financial irresponsibility, missed payments, and late payments.
If you know that you’ve been staying on top of your credit payments, your credit score should show that, and you shouldn’t have anything to worry about.
Remember that your payment history accounts for 35 percent of your FICO credit score, so it’s always a great idea to stay on top of your payments, even if it’s just making a minimum payment. Check with each credit bureau and review your credit history.
Credit Score
Creditworthiness also considers your credit score. Your credit score uses your credit report to measure you on a scale to determine if you are creditworthy.
Having a higher credit score means that you also have higher creditworthiness. Conversely, having a low credit score typically means low creditworthiness.
Credit Report
Credit reports detail the amount of debt you’re carrying, the current balance of your credit accounts, any high balances, and credit limits.
The credit report also flags any other critical data for a potential credit or mortgage lender, including if you’ve had any collections, bankruptcies, defaults, or past due amounts.
Knowing your creditworthiness is essential when you’re trying to get a credit card or a car loan. But that’s not the only reason.
The higher your creditworthiness is, the better off you are in the long run.
This is because you can typically get better conditions and terms on loans and credit cards, fewer fees, and lower interest rates, which means you’ll have more money left over each month.
Creditworthiness can also affect your employment eligibility, business funding, professional licenses and certifications, and insurance premiums.
How to Check Your Creditworthiness
Equifax, TransUnion, and Experian are the three significant credit reporting bureaus that will measure your creditworthiness.
Credit lenders will pay these credit reporting bureaus to gain access to credit data on existing and potential credit customers while also using their credit score calculating systems before approving new credit.
Take this example:
John has a credit score of 700 and thus has a high creditworthiness rating. John then gets approved for a new credit card with an interest rate of 12% and a \$6,000 credit limit.
Mary has a 600-credit score and therefore has a low creditworthiness rating.
Mary gets approved for a new credit card with an interest rate of 24.9% and a credit limit of $1,500.
You can see from this example that Mary will ultimately pay more in interest payments over time than John will. This is because of their different creditworthiness.
Everybody should take the time to keep track of their credit score because it’s a significant factor that financial institutions use to decide if they’re eligible for specific credit limits, preferred interest rates, and credit.
You can request a free copy of your credit report once a year. Or, if you want to monitor your credit more often, you can join a credit score monitoring site such as Credit Sesame or Credit Karma. These sites allow you to keep track of your credit history quickly and often without impacting your credit report.
How Can You Improve Your Creditworthiness?
There are many ways that you can work to improve your creditworthiness by improving your credit score.
The best way to improve both is to pay your credit card bills on time, make sure that you’re up to date on late payments, or get a payment plan set up to pay off any past-due debt.
Also, try to pay more than the minimum monthly payment. This will help you pay down the debt faster and reduce late fees.
Try keeping your credit card balances at 20 percent or less of your credit limit; 10 percent is the ideal usage amount. Next, check on your debt-to-income ratio. You want to be somewhere between 35 – 43 percent with this ratio.
To calculate your debt-to-income percentage, you divide your total monthly debt amount by your gross monthly income. Credit lenders will use this ratio when they assess your creditworthiness.
The best way to get an extremely high credit score (800 or higher) is by using credit cards. You can follow the steps below to get those high scores:
- Automatically pay off your credit card each month. If you aren’t confident that you can automatically pay off your credit card in full monthly from your bank account, then you probably shouldn’t have a credit card or multiple credit cards.
- Don’t close a credit card account. Closing any credit card account can hurt your credit history. Instead, opt for a credit card that doesn’t have an annual fee and leave that account open.
- Having more credit means that you’ll have a higher credit score. As you feel more comfortable using a credit card and paying it off in full each month, you can expand your credit usage. Apply for new credit cards with different banks or ask your bank to increase your credit limit. You’ll find that your score will drop for about 90 days after opening a new line of credit, but then you’ll see it increase.
You can order a free copy of your credit report once a year from Equifax, TransUnion, and Experian.
This is a great way to ensure that everything is accurate and dispute anything that looks incorrect. When you dispute a claim, make sure that you have supporting documentation to support your argument.
Additionally, you can dispute errors with the company reporting incorrect information.
Keep in mind that it’s challenging to restore creditworthiness once it’s lost. To restore your creditworthiness, you’ll have to work extremely hard to restore and keep it. So, it’s best to follow the tips in this article to help you stay on track.
Conclusion
Knowing the answer to “what is creditworthiness?” will help you in the long run regarding your financial health and credit score.
As you can see from this article, creditworthiness is a critical topic to understand and can help you in the long run. Hopefully, this article has helped you figure out what you need to do to find your creditworthiness, and what you can do to fix it.