Creditworthiness

What is 'Creditworthiness'

Creditworthiness is a valuation performed by lenders that determines the possibility a borrower may default on his debt obligations. It considers factors, such as repayment history and credit score. Lending institutions also consider the amount of available assets and the amount of liabilities to determine the probability of a customer's default.

BREAKING DOWN 'Creditworthiness'

Several businesses have established credit rating systems to determine the creditworthiness of an individual or company. It is essential for every person to keep track of his credit score because this is the primary factor that financial institutions use to decide if the person is eligible for an advantageous interest rate. Payment history or credit history depicts how a person meets debt obligations, which establishes creditworthiness or the financial character of a person. Payment history counts for 35% of a person’s credit score.

Creditworthiness is depicted as a credit score. A high credit score provides high creditworthiness. In addition, creditworthiness considers other factors such as age, income, financial obligations, employment status, total debt owed, types of accounts, length of payment history and the ability to repay debt. It determines the interest rate, fees and terms and conditions of a credit card or loan. It also affects employment eligibility, insurance premiums, business funding and professional certifications or licenses.

The three prominent credit reporting agencies that measure creditworthiness are Experian, TransUnion and Equifax. Lenders pay the credit reporting agencies to access credit data on potential or existing customers in addition to using their own credit scoring systems to grant approval for credit.

For example, Mary has a 700 credit score and has high creditworthiness. Mary gets approval for a credit card with an 11% interest rate and a $5,000 credit limit. Doug has a 600 credit score and has low creditworthiness. Doug gets approval for a credit card with a 23.9% interest rate and a $1,000 credit limit. Doug pays more in interest over time than Mary.

How to Improve

There are several ways an individual can improve his credit score to establish creditworthiness. The main way to increase creditworthiness is to pay bills on time. Get current on any late payments or set up payment plans to pay off past due debt. Pay more than the minimum monthly payment to pay down debt faster and reduce the assessment of late fees.

Order a free copy of your TransUnion, Experian and Equifax credit reports. Review all the information for accuracy and dispute any errors. Provide supporting documentation to substantiate your dispute claim. In addition, you can dispute inaccurate information with the company reporting the error.

Keep credit card balances at 20% or less of the credit limit; 10% is ideal. Verify your debt-to-income (DTI) ratio. An acceptable DTI is 35%, but 28% is ideal. DTI can be calculated by dividing your total monthly debt by your total gross monthly income. Lenders use DTI when assessing an individual’s creditworthiness. Creditworthiness is difficult to restore once it is lost; individuals must work diligently to retain their creditworthiness.

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