Creditworthiness is a description of a borrower’s likelihood of paying back a loan based on their credit history and credit health. Lenders use credit scores and reports to evaluate a potential borrower’s creditworthiness.

Creditworthiness is a way to describe how trustworthy a borrower is when taking out loans or forms of credit. It’s usually determined by a credit score or credit report, which shows your history of borrowing and making payments.

What Is Creditworthiness?

Creditworthiness is important to lenders since it represents how likely you are to default on a loan (or repay it in full). Creditworthiness is the lender’s method of assessing the risk associated with granting the loan. Your creditor will want to ensure that the debt is paid.  A thorough credit analysis will be an essential step in reviewing your credit application for most forms of credit or loans.

Assessing Consumer Creditworthiness

Upon requesting a loan, your lender will want to make sure that you can be trusted to repay the debt. That is why lenders use several assets — from their own programs to third-party business intelligence — to analyze how creditworthy you are. Resources such as credit reports, lender’s own credit scorecards, and various credit scoring models provide them with valuable insights which help paint a picture of your overall financial responsibility.

Credit Report

The credit report is a living document that gives plenty of information on your financial history. Your credit report is updated as new data pours in (e.g. repaying a loan earlier than expected may be listed). The reports are issued by the three largest credit reporting agencies (also known as “credit bureaus”) — TransUnion, Equifax and Experian. These documents offer information to creditors including current balances, active credit limits, previous loans, payment history, and so forth. A credit score allows lenders to assess your creditworthiness, without having to dig through troves of data.

Credit Score Models

The credit score is a three-digit number that depicts how creditworthy you are. Several models, such as VantageScore and CE Score may be used in calculating your score. Most commonly used is the FICO scoring model. Created by FICO (Fair, Isaac and Company), the classic FICO model gives a number that represents how creditworthy an individual is on a scale from 300 to 850. Having a higher score on any of the models depicts high creditworthiness (lower risk for the lender). Lower numbers represent lower creditworthiness (higher risk for the lender).

The Major Components of Your Credit Score

The FICO score uses a significant amount of data to give a numerical representation of your creditworthiness. These parameters are related to your financial history, but their relative importance may differ from one person to another. The data together makes up several significant factors that affect your credit score:

  • Payment history: Making up 35% of the score, the most influential factor is your payment history. This factor encompasses information such as late payments, loan defaults, settlements, repossessions, and other.
  • Debt burden: The second biggest component is debt burden, comprising 30% of the score. Debt burden includes the debt owed across accounts, the amount repaid through installments, and credit utilization rate.
  • Length of credit history: as your credit accounts age, you will get more points. This factor also depends on the average age of your credit accounts and represents 15% of the score.
  • Loan types (10%) and recent credit (10%): Loan types and any opened accounts will also affect the FICO score.

The Benefits of High Credit Score

Having a high credit score is associated with being more creditworthy — less likely to default on your loan. Creditors use different parameters to determine how likely you are to repay the loan. Maintaining an excellent FICO score can help you go a long way towards having your request granted. To apply for a loan at CreditNinja, you need not have a perfect credit score.

Good Creditworthiness Equals Fewer Costs

Being creditworthy has multiple benefits. Since the lender has a lower risk when granting loans to a creditworthy person, the chances of being approved become higher. Greater creditworthiness also means better terms and conditions, such as lower interest rates and higher credit limit. As certain employers seek to check your creditworthiness prior to hiring, you’ll have more employment opportunities, too. All these benefits can be gained by maintaining healthy financial habits.

Maintaining and Improving Your Credit Score

To increase your credit score and experience the benefits of creditworthiness, making on-time payments is important.  Clear outstanding loan balances and get into the habit of paying bills on time. To improve your FICO score, keep your overall credit utilization rate below 30% (your total credit balance divided by the sum of credit card limits). You can do that by using only a small portion of the limit or having your credit limit increased.  It’s helpful to remember that you are entitled  to a free annual credit report from each of the three major reporting agencies. Visit Annual Credit Report to order yours.

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