The Importance Of Creditworthiness
There are many factors that determine your creditworthiness. This term refers to the different factors that lenders will look at when discerning the probability of your ability to pay back a loan. Some of these factors include assets, existing loans, your credit score, and credit history. If you had to come up with a creditworthiness definition, it would be the extent to which you’re deemed worthy of receiving financial credit based on your financial history.
By combining all the different aspects of your financial situation, a lender can put together a clearer picture of your viability as a loan candidate. Therefore, they can assess the risk of loaning you money.
What Is Creditworthiness?
Of course, your creditworthiness doesn’t define you, but it does tell lenders a lot about your financial history and your probability of repaying any debts. So how do lenders determine creditworthiness? It’s made up of the following factors:
- Repayments: Your loan history and record of repayment are very important. If you have missed repayments, you’ll get a lower score. If you pay on time, you’ll fortify your financial standing
- Credit score: This is a number between 300-850 that’s primarily based on information sourced from credit bureaus
- Credit history: This is a record of a borrower's responsible repayment of debts. It helps to give lenders a long-term view of your financial past
Other factors that may influence the lender’s assessment is your income and any collateral you’re willing to put up.
Your creditworthiness helps determine what kind of loan you get, its terms, and its interest rates. It’s important to maintain good financial standing so you’ll have more flexible options available to you.
How Creditworthiness Impacts Your Life
Suppose you have a demonstrated history of financial responsibility. No doubt, you worked hard for that. You can now enjoy the rewards of loan options, lower interest rates, better terms, and better conditions.
For those who have missed payments, overdue loans, or other signs of financial irresponsibility in their past, their creditworthiness will be deemed low. Why does this matter? Here are some of the consequences of a poor financial history:
- It’s more difficult to obtain home loans and car loans
- Getting a credit card will prove more difficult
- You may be ineligible for many loans
- If you do get a loan, the interest rates will likely be higher than someone with a better credit history
- Car insurance, renter’s insurance, and homeowner’s insurance could be more expensive
How To Check Your Creditworthiness
Your creditworthiness isn’t a big mystery. You have access to it whenever you’d like to learn more about your finances. There are three main credit reporting agencies responsible for measuring creditworthiness. These agencies include Experian, TransUnion, and Equifax.
When lenders go to check your financial standing, what they’re actually doing is paying these agencies to access your credit data. Often the lender will combine the information they gain from these agencies with their own scoring system to give you a final score.
Tips For Improvement
If you don’t have a stellar financial past, don’t panic. It’s never too late to adopt healthier financial habits and to begin a new pattern of smart and responsible spending and repayment habits. Some methods you can implement to improve your creditworthiness include:
- Pay your bills on time. Try setting up automatic payments, so you don’t miss any. Be sure to take care to clear any past debt
- If you’re able, try to pay more than the minimum monthly payment on the debt
- Learn more about the debt-to-income ratio and verify yours. Make improvements to this number if necessary
- Keep track of your budget and monthly expenses. This can easily be done on your computer or with the help of a financial planning app
- Consider speaking to a financial coach or someone who can help you assess your financial situation. A professional can help you make more concrete plans and give you recommendations for improving your status
Need to know if you’re credit worthy? Do your homework and dig into all the financial aspects of your life. If you see room for improvement, do so immediately. Having a strong financial background can be a powerful tool in opening more doors and opportunities for all the great things you hope to achieve.