Creditworthiness is a measurement that banks and credit card issuers use to deem you worthy of credit based on financial markers. These markers can vary by company but are usually based on your income, credit score, assets, payment history, credit accounts, and credit utilization. Your creditworthiness is key to securing financial assets, so it’s in your best interest to maintain strong credit scores and manage your debt effectively.
The Importance of Creditworthiness
Your creditworthiness can affect your ability to receive loans, credit, and even housing, having a huge impact on your ability to live. You’ll need to be creditworthy even to get a credit card, including a business credit card. Not to mention, once you’re approved for credit cards and home loans, your creditworthiness will also determine the interest rates you’ll accrue on those products.
High creditworthiness gives you access to credit at more reasonable rates while low creditworthiness will usually limit your options. An estimated 15 million people use less desirable small-dollar credit products like payday loans, pawn loans, and car title loans when they don’t have access to traditional credit because of their lack of creditworthiness. These products typically have very high interest rates and cost significantly more than credit cards.
How credit issuers and banks measure your ability to manage and repay debt responsibly will have the largest impact on your financial status. The more creditworthy you are, the more access you’ll have to higher credit limits on credit cards and favorable terms loans.
Creditworthiness works much the same if you’re a small business owner. You’ll be evaluated by your personal credit history and income along with the type of credit accounts. However, dealing with business credit and personal credit means that banks and lenders may also use business information like business statements and financial history. If you intend to apply for business loans and credit cards, it’s essential to build business credit to establish your business’s creditworthiness.
Factors That Determine Your Creditworthiness
Banks and credit issuers use a variety of resources, including credit reports and credit scoring models, to measure your creditworthiness. For example, it’s likely they will gauge your payment history, credit usage, and personal information, including jobs and previous addresses. While these factors can vary from company to company, they typically include:
- Credit report: Often, the most used and relied upon by lenders, creditors, banks, and even apartment screeners, your credit report is the single most important resource for creditworthiness.
- Credit score: Your credit score is a numerical representation (300 to 850) of your creditworthiness based on the information in your credit report. A higher score indicates you’re a more trustworthy borrower.
- Income: Even with the best of credit, your income is one of the most important factors. Banks are required by the Fair Credit Reporting Act (FCRA) to verify your income and ensure you can make the monthly payments.
- Assets: Real estate lenders often require this level of verification during the application. These lenders use available assets like real estate, investment and retirement accounts, and life insurance when evaluating your creditworthiness.
- Debts: Your creditworthiness is impacted significantly by the money you owe to creditors, lenders, and credit card issuers. You should have a debt-to-income (DTI) ratio of 35% or less to qualify for most credit cards and loans.
- Liabilities: These can include debts but can also include any other bills and money you owe to creditors, companies, or people. Credit card issuers and lenders may use this information to determine your ability to repay debt.
How Creditors and Lenders Measure Creditworthiness
Your credit score is the numeric representation of your creditworthiness and is relied most often upon for most credit applications. Credit scores can vary depending on the scoring model used, FICO® or VantageScore®, but generally range from 300 to 850, with 850 being the best possible score. The credit score categories that separate “good” from “bad” credit include:
FICO® Credit Score
740 to 850
781 to 850
670 to 739
661 to 780
580 to 669
601 to 660
300 to 579
300 to 600
These scores are used by most credit card issuers and banks to approve or deny your credit application. You have the best chance of approval with credit scores of at least 670 regardless of the scoring system used. Lenders also consider your employment and income even though education and employment don’t factor into your credit score.
Tips to Improve Your Creditworthiness
Improving your creditworthiness is similar to improving your credit score. Like a credit score, you’ll need a solid payment history and a credit utilization ratio of less than 30%. Americans have nearly $1.09 trillion in credit card debt, so decreasing your debt will improve credit issuers’ confidence in your ability to take on more debt. You can also improve your creditworthiness by:
- Making timely payments: Late payment payments reflect negatively on your credit. Paying your bills on time will help improve your creditworthiness with banks and card issuers.
- Reducing credit usage: Your credit utilization ratio makes up nearly 30% of your credit score, so it’s important to keep it below 30% of your total available credit.
- Lowering DTI: Reducing your debt to less than 35% of your income will improve your chances of loan approval and increase creditworthiness.
- Paying debt down quickly: The quicker you pay down debt, the faster you’ll improve your credit and creditworthiness.
By following a few good credit practices, you can improve your credit scores, reduce your debt, and improve your desirability in the eyes of lenders. This will be crucial as you continue to live life and apply for various loans and credit cards. You’ll also be positioned better to secure other assets in the future.
Creditworthiness affects you in more ways than one, and yet the definition of creditworthiness can often be unclear. Your creditworthiness is essentially a measurement of your ability to manage your bills and repay your debt responsibly. However, ultimately, credit lenders decide how to measure your creditworthiness. It’s a safe bet that if you keep your credit scores high and pay your bills promptly, your creditworthiness will be strong.