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'

The creditworthiness of an individual or company are determined by several businesses who have established credit rating systems. 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.

RELATED TERMS
  1. Credit Score

    A credit score is a number ranging from 300-850 that depicts ...
  2. Credit Rating

    A credit rating is an assessment of the creditworthiness of a ...
  3. Credit Scoring

    Credit scoring ranks a small business or individual's credit ...
  4. Credit Agency

    Credit agencies gather debt information that is used to generate ...
  5. Credit Limit

    Credit limit is the amount of credit that a financial institution ...
  6. Good Credit

    Good credit is a classification for an individual's credit history, ...
Related Articles
  1. Personal Finance

    How Your Credit Score Compares to the Average American's

    While only a small percentage of Americans have terrible credit scores, a whopping 30% have poor or bad credit, according to the Consumer Financial Protection Bureau.
  2. Personal Finance

    Credit score ranges: What do they mean?

    Take a closer look at what credit scores in each range mean for your financial future. Learn how to improve your credit score and how it affects your interest and ability to borrow money.
  3. Managing Wealth

    Can You Hit A Perfect Credit Score?

    Everyone wants a great credit score, but few know exactly how to achieve perfection. Find out how your credit score is kept and what it takes to reach a perfect 850 rating.
  4. Personal Finance

    Is Your Credit Score at 850? It Can Be!

    Use these tips to increase your credit score and your ability to get low interest rates on loans.
  5. Personal Finance

    Do You Understand Your Credit Score?

    Most Americans don't really understand their credit scores. Find out what you need to know.
  6. Personal Finance

    The 5 biggest factors that affect your credit

    Are you in the process of getting a loans? Learn how credit companies use these factors credit companies rely on to determine whether to lend to you and at what rate.
  7. Personal Finance

    Credit Score vs. Credit Report: Which Is Better?

    They sound alike, but can serve very different ends.
  8. Personal Finance

    How to Read Your Consumer Credit Report

    Learning how to read your consumer credit report is vital, as it includes important information about your credit history.
  9. Personal Finance

    Credit Scores And Your Mortgage Payment: It Matters

    Your credit score can have a huge impact on your mortgage payments. Here are some reasons why.
RELATED FAQS
  1. What's the difference between credit score and credit history?

    Check out the differences between credit score and credit history, and learn how your credit history is used to create your ... Read Answer >>
Trading Center