How to Evaluate Your Creditworthiness

Posted by Sha'Kreshia Terrell in CreditJanuary 14, 2023(Last Updated January 13, 2023)4 min read
Key Takeaways
  • Creditworthiness refers to whether a person or company is considered fit to receive a loan or line of credit, often based on past financial borrowing experiences.
  • A company's lending decisions are typically based on your previous credit management behavior. 
  • You can become creditworthy by following simple steps and gaining disciplined financial habits.
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What is Creditworthy?

 

Creditworthiness refers to whether a person or company is considered fit to receive a loan or line of credit, often based on past financial borrowing experiences. A creditworthy borrower is one who a lender believes is responsible enough to make loan payments as agreed until the loan amount is repaid in full.

 

When you apply for a loan, your lender will consider your credit score to determine whether or not you're likely to repay the loan on time. They will also consider your income, amongst other financial factors.

When determining the likelihood of defaulting on a loan, some lending institutions consider available assets and the number of liabilities you have. 

 

Recommended Read: The Difference Between Assets and Liabilities 

 

How to Evaluate Your Creditworthiness 

 

Your creditworthiness shows lenders that you are qualified for your submitted loan or credit card application. The company's lending decisions are based on your previous credit management behavior. To accomplish this, they consider your entire credit history, credit score, and payment history.

 

Credit Report

 

Your credit report contains details about your debt burden, credit limits, overdrafts, and the current balances on your accounts. Additionally, it will highlight crucial information for the potential lender, including past due amounts, defaults, bankruptcies, and collection concerns.

 

Credit Score

 

Your credit score is another indicator of your creditworthiness, based on your credit report, and measures you on a numerical scale. A high credit score indicates that you are creditworthy. On the other hand, low creditworthiness is caused by a low credit score.

Two women looking at their credit card account to evaluate their credit score

 

Payment History

 

To evaluate your creditworthiness, it's also crucial to consider your payment history. People having a history of missed payments, late payments, and overall financial irresponsibility are typically not given credit by lenders.

 

FICO Score

 

Your FICO score is calculated as 30% debt owed, 10% new credit, 15% length of credit history, 10% credit mix, and 35% payment history. Therefore, even if you have to make the minimum payment, staying consistent is essential since it makes up the most significant portion of your credit score.

 

Your creditworthiness level will determine whether you can get a vehicle loan or a new credit card. The more creditworthy you are, the better it will be for you in the long run. A high level of creditworthiness results in lower interest rates, fewer fees, and better terms and conditions on loans. This often translates into you having more money in your pocket. Furthermore, it impacts business finance, insurance premiums, and professional certifications and licenses. 

 

Recommended Read: Can My Debit Card Usage Affect My Credit Score?

 

Three C’s of Credit

 

Your credit score is determined by the three c’s of credit: character, capacity, and collateral. 

 

Character

 

Your character is the first thing that lenders look at when determining your creditworthiness. If you've been late on a payment or had trouble paying off debts in the past, this will negatively impact your character score. On the other hand, a good character score reflects someone who takes their financial responsibilities seriously and pays their bills on time every month without fail.

 

Having a good relationship with your bank can increase your approval odds on a loan if you have less-than-perfect credit. Besides good rates, you can expect a shorter processing time and little to no paperwork.

Married Black couple talking to a banker for a loan

Capacity

 

Capacity refers to your financial situation. Lenders will look at how much money you make and save each month, along with looking into any assets you have that could be used as collateral. In essence, lenders compare your assets and liabilities. More liabilities than assets could signal to the lender that you are at high risk of not being able to make payments on time.

 

Collateral

 

Collateral is property or money that can be taken away from you if you default on your loan payments. For example, if you take out a mortgage on your home, the lender can take back the house, also known as foreclosure, if you don't make payments on time.

 

Recommended Read: Credit Card Churning Explained | CapWay

 

Tips for Increasing Creditworthiness

 

You can do several things to improve your level of creditworthiness which include:

 

  • Make payments on time
  • Have a mixture of credit
  • Don’t close old accounts
  • Only apply for credit when needed
  • Keep credit card utilization rates below 30%
  • Strive to keep the debt-to-income ratio below 35%

 

Debt-to-Income Ratio

 

Your debt-to-income ratio can be calculated by dividing your total monthly debt by your total monthly gross income.

 

Check Your Credit Report Regularly

 

You may also request a free copy of your credit reports from Equifax, Experian, and TransUnion. Check the accuracy of all the data and dispute any discrepancies. To support your dispute claim, offer supporting documentation. Inaccurate information listed on your credit report can also be disputed with the organization reporting the mistake.

 

The Money Wrap-Up

 

Ultimately, it's about responsibility and trust. Being creditworthy gives you the ability to buy items on credit without having to reduce your cash flow. The downside of not being creditworthy could cost you time and money. Once you have established yourself as not being creditworthy, it will take hard work to regain and maintain trust with a lender

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