What is Creditworthiness and Why Does It Matter

If you’re on the hunt for a new credit card or loan, or you’ve taken one out in the past, then you may have heard of the term “creditworthiness”. Whether it’s a mortgage, auto loan, personal loan, or some other type of financing, your creditworthiness will play a crucial role in what you will and won’t qualify for.

Creditworthiness encompasses a few metrics, such as your income, credit score, and credit report, but in short, it provides an overall financial profile so that lenders can determine how much of a risk you are as a borrower. Remember, loan issuers make money through interest and fees, so they don’t want to lend to someone who is less likely to pay them back. While some lenders may place a stronger emphasis on one metric — for instance, your credit score — others may care more about other factors, such as income and credit history.

Let’s dive in and take a closer look at the different components of creditworthiness and how they’re evaluated by lenders.

How Do Lenders Obtain Your Information?

To qualify for a loan, applicants must first submit some personal information. This includes basic details like your name, address, and contact information. A lender will also ask finance-related questions that will allow them to better determine your eligibility, such as your income and employment status.

Once you submit your application, lenders will typically run a hard credit check that will pull both your credit score and credit report—two major factors that determine one’s creditworthiness. For example, a lender might take a look at what your income is and how much debt you currently have in order to help them gauge your ability to make monthly payments on the loan you’re applying for.

What Role Your Credit Score Plays

Your credit score is a three-digit number that typically ranges from 300-850, with 850 being the best score you can receive. This score is designed to demonstrate your credit risk as well as how likely you are to pay your debt obligations on time.

The following credit score ranges will give you an idea of how your score may be perceived by lenders:

  • 800 – 850: Excellent
  • 740 – 799: Very Good
  • 670 – 739: Good
  • 580 – 669: Fair
  • 579 or below: Poor

So how are these scores calculated and why are they so important?

These numbers are carefully calculated based on a number of factors, including how much debt you have, your payment history, the length of your credit history, and other data from your credit report. Having a higher score reveals that you’ve shown financial responsibility in the past, whether it’s by making your payments on time or keeping your debts low.

A low score, on the other hand, indicates to creditors and lenders financial instability, which might make them hesitant to lend to you.

What Your Credit Report Contains

So by now, we know that your credit report contains valuable personal information about you that creditors and lenders check when determining your creditworthiness. You are probably wondering what else can be found on your credit report and how you can view it for yourself.

Every year you’re entitled to one free credit report from each of the three main credit bureaus: Experian, TransUnion, and Equifax. You can quickly and easily view your full report online by visiting their websites.

Keep in mind that your credit report does not actually include your credit score, but there are plenty of financial services websites that can provide it for free. You can also check your current loan statements to find your score.

Here is the information you’ll find on your credit report:

  • Personal details such as your name, address, birth date, phone number, and social security number
  • Information on new and old credit accounts, including the account types, your account balances, payment history, the name of each creditor, and your available credit limit
  • Any debt collections
  • Public records, such as liens, bankruptcies, foreclosures, and civil suits
  • Inquiries from companies that have viewed your credit report

Based on this, you should now understand that lenders who run a hard credit check can see pretty much everything about you in regards to your finances. All of these items come together to determine how risky you are likely to be as a borrower.

Creditworthiness Varies

It’s helpful to understand that your creditworthiness varies depending on the loan type you’re trying to obtain. For example, mortgage loan lenders have much stricter requirements and standards as opposed to lenders for payday loans (which almost anyone can obtain) or credit cards.

The reason that it’s so much more difficult to get approved for a mortgage loan is simply that it’s a much higher risk for the lender. After all, they’re lending you a large sum of money with nothing to back it up in case you default on your loan. Securing your loan with collateral, however, will help reduce the risk so you can qualify.

Applying for a credit card, on the other hand, is likely to be met with approval, even if you have a low credit score or shoddy credit history. Should this be the case, you’ll probably just get hit with a higher interest rate.

How to Improve Your Creditworthiness

While no one has a perfect credit history, establishing a few good habits can keep your credit score going strong and even improve it. Let’s take a look at some healthy habits you can start implementing that will boost your overall creditworthiness.

Makes Payments On Time, Every Time

Payment history is one of the first things that lenders will look at in your credit report. A history of timely payments goes a very long way in demonstrating your financial stability, responsibility, and creditworthiness.

Keep Your Debt Low

When lenders view your credit report, they will likely want to see what your debt obligations are so that they can determine your ability to take on new debt. Part of that means checking your debt-to-income ratio, which is the percentage of your income that goes toward paying your debts. It is calculated by dividing all of your monthly debt payments by your total monthly income. A great strategy for managing and overcoming debt is via debt consolidation.

Add a Cosigner

If your credit is lacking, riding on the coattails of someone who is more creditworthy can help. Having a cosigner on your loan means they are accepting shared responsibility and could be on the hook for making payments if you fall behind for any reason. While having a cosigner can help contribute to your own creditworthiness, just keep in mind that falling behind on payments would have a negative effect on their credit too.

Conclusion

If your credit score or credit history feels like it has room to improve, there are plenty of steps you can take to strengthen it and your overall creditworthiness. Just remember that “creditworthiness” is a loose term and its meaning can vary depending on the lender and what kind of loan you’re seeking. Some types of loans will have stricter requirements while others will be laxer.

While it may be tough to gauge exactly how strict a lender is and what they care about most in your credit report, knowing what information they use to determine your eligibility is the first step in improving your financial health and increasing your likelihood in securing a loan.

Jessica Cotzin Jessica Cotzin Last update:
Jessica Cotzin is a writer and the Lendstart authority on small businesses and personal loans. She has been writing about personal finance and the loans industry for a number of years, and holds a bachelor’s degree in journalism from Florida Atlantic University.