What Is Creditworthiness?

The simple definition of creditworthiness is how likely a borrower is to pay back their debt on time. When you apply for a loan, the lender will evaluate your application to determine how much risk they’d take on by approving your loan. If lenders think you’ll be able to comfortably afford he conditions of your loan agreement, they consider you creditworthy.

Let’s discuss how lenders decide what makes a borrower creditworthy, why creditworthiness matters, and how to check and increase your creditworthiness.

How To Check Your Creditworthiness

If you want to see how creditworthy you are, each of the three major credit bureaus – Equifax^®, TransUnion^® and Experian™ – offers a free weekly credit report you can access in one fell swoop at AnnualCreditReport.com. If you’re not sure what to make of your credit report, consider the following credit score benchmarks, and that 717 was the national average FICO^Ⓡ Score as of October 2023.

While your credit score plays a key role in your creditworthiness, it’s not the only factor that lenders consider. When you apply for a loan, lenders will also look at your income, employment history, assets, how much debt you owe and any collateral you’re using to secure your loan.

What Determines Your Creditworthiness?

Lenders use different models, data and information to determine your creditworthiness. Though each lender’s process may differ slightly, most lenders pull information from the three main credit bureaus, evaluate your personal financial situation and assess the value of any collateral being used in an effort to secure the loan.

Your credit report and credit score are among the most critical factors in determining your creditworthiness, but they aren’t the sole basis on which lenders judge a potential borrower’s ability to repay a loan on time and in full.

What will your creditworthiness be based on? Here’s a full breakdown.

Credit Report

Your credit report contains details about your past and present debt obligations, such as loan balances, credit limits and any defaults or bankruptcies you may have gone through. If you open or close a credit account, make on-time payments, default on your payments or file for bankruptcy, all of that information is documented on your credit report. A clean credit report with a long history of on-time payments goes a long way toward boosting your creditworthiness.

Credit Score

Your credit score is based on information from your credit report and looms large in a lender’s evaluation of your creditworthiness. Credit scores usually range from 300 – 850, with 850 representing the highest possible score. Your credit score is based on payment history (35%), the amount you owe (30%), the length of credit history (15%), credit mix (10%) and new credit accounts (10%). As your credit score improves, so does your creditworthiness.

Collateral

If you’re taking out a secured loan (such as a mortgage or car loan), which includes collateral, a lender will consider the value of that collateral when evaluating your loan application. Collateral you pledge can boost your creditworthiness and lower a lender’s risk.

Financial Situation

Lenders also examine your overall financial situation, which includes your assets, income and debt-to-income ratio (DTI). Some borrowers may not have the best credit score, but if they have a low DTI, a good income and some collateral of meaningful value, a lender might deem them creditworthy. On the other hand, a challenging financial situation can make an applicant less creditworthy, even if they have a good credit score.

Employment History

A consistent job dating back several years can help reassure lenders you have a stable income from which to make loan payments. Self-employed people, with potentially less stable income, and employees who switch jobs frequently may be viewed as less creditworthy by lenders.

Why Does Creditworthiness Matter?

Creditworthiness is pivotal for multiple reasons. It not only helps you borrow money when you need financial assistance, but it also plays a role in securing a lease and buying insurance, and it can even impact one’s ability to get a job.

Now for a deeper dive.

• Loans and lines of credit: When you apply for a loan or a line of credit, lenders use your creditworthiness to decide whether to approve your application. If you’re approved, your creditworthiness will impact the conditions of your loan. For example, being especially creditworthy usually means a favorable interest rate and loan repayment term.
• Renting a home: Like lenders, landlords want to know you’re financially responsible before they approve your lease application. Though landlords may not have the minimum credit score requirements of lenders, your creditworthiness can help (or hurt) your rental application.
• Employment: Before hiring a new employee, some employers (such as financial firms and government agencies) may choose to run a credit check to verify the applicant’s identity and assess their financial responsibility and overall reliability. A high credit score could help you land your next job.

How Can I Become More Creditworthy?

Making efforts to improve your creditworthiness can be an excellent investment of time and even money. While improving your credit is possible, it’s important to realize that it takes time and might not happen as quickly as you’d like. To become more creditworthy, you can take the steps discussed next.

Monitor And Review Your Credit Reports

Monitoring and reviewing your credit reports regularly can help you understand the health of your credit profile and prevent any mistakes or fraudulent activity that could impact your credit. Based on the findings of a Consumer Reports analysis reported by CBS News in February 2024, complaints made to the Consumer Financial Protection Bureau in connection with mistakes on credit reports have more than doubled in the last 3 years.

Since you can request one free report each week from each of the aforementioned credit bureaus, keeping a watchful eye on your credit report won’t cost you anything.

Limit The Number Of New Credit Applications

When a lender or creditor submits a new credit inquiry to examine your credit, you might notice that your credit score temporarily drops by a few points. As a result, your creditworthiness will suffer for a short time.

Additionally, opening a new credit card or taking out a new loan can reduce the average age of your accounts, which can also hurt your credit.

Make Your Payments On Time

Making on-time payments on any debt you have is one of the best ways to boost your creditworthiness. Since your payment history makes up 35% of your credit score, making your monthly loan payments and/or paying your credit balances on time should be a top priority.

Keep A Low Credit Utilization Ratio

A low credit utilization ratio can increase your credit score, so attempt to keep your credit utilization at no higher than 30%. Your credit utilization represents how much of your credit you use relative to the amount of credit you have available.

For example, if the combined credit limit for all your credit cards is $20,000 and you have a total balance of $2,000, your credit utilization ratio is 10%.

Keep Your Credit Accounts Open

The length of your credit history makes up 15% of your credit score, so the longer your accounts are open, the better. While it’s okay to open a new credit account if absolutely needed, it’s best to avoid unnecessarily closing your oldest credit accounts. Doing so will negatively impact your creditworthiness.

The Bottom Line: A Borrower’s Creditworthiness Carries Major Weight With Lenders

Being aware of your creditworthiness is vital to maintaining your overall financial health. Lenders consider a variety of factors when they evaluate your creditworthiness. These include your income, credit score and DTI.

The better your creditworthiness, the likelier you are to be approved for your next mortgage or car loan and end up with a reasonably low interest rate.

Ready to take control of your finances and track your creditworthiness? Download the Rocket Money℠ app today.