Creditworthiness is a measure of how risky a person is as a borrower based on the individual’s credit history, income, and debts. In general, the more creditworthy you are, the more trustworthy lenders will consider you to be and the more likely you are to be approved for better credit cards and loans.
The easiest way to estimate your creditworthiness is to check your latest credit score, which you can do for free on WalletHub. Just don’t make the mistake of assuming “creditworthiness” is merely another way of talking about credit scores and reports because those are far from the only factors considered. Below, you can learn more about all of the factors that affect creditworthiness.
Just don’t make the mistake of assuming “creditworthiness” is merely another way of talking about credit scores and reports because those are far from the only factors considered. Below, you can learn more about all of the factors that affect creditworthiness.
Factors That Affect Creditworthiness
- Credit Report – When you apply for credit, lenders look at your credit report, which includes information on your loans and lines of credit, such as balances, credit limits and payment history, along with credit inquiries and certain public records.
- Credit Score – Creditors may consider your credit score, which is basically a grade for the contents of your credit report, ranging from 300 to 850. You should aim for a score of at least 700, which is “good credit.”
- Income – In some cases, high income can compensate for a bad credit score. If you’re making lots of money, your ability to borrow and pay back larger amounts increases, unless you already owe a lot. One comparison lenders usually make is the ratio of your income to your debt. The better that ratio, the better positioned you are for making payments on new debt.
- Assets – Assets are any valuable property you own, such as houses, cars or stocks. If your assets have a lot of value, lenders know you can use them to settle debts.
- Debts – How much you owe affects how much you can borrow. Not only will debt bring down your credit score in many cases, but it also makes creditors doubt how capable you are of paying them back.
- Liabilities – Liabilities are amounts of money that you are obligated to pay in the future. They are not necessarily debts, but rather any agreements that will reduce the amount of money you have later on. Some examples are taxes, monthly bills, or a mortgage.
Although people often refer to creditworthiness and credit scores interchangeably, lenders clearly take a variety of factors into consideration when deciding whether you’re worthy of credit.
It’s also important to remember that creditworthiness is a relative concept. Just because you are creditworthy enough for one financial product doesn’t mean you’re qualified for another. For example, you might be described as creditworthy if you meet the approval standards of a particular credit card. But if it’s a secured credit card and you have bad credit, most lenders wouldn’t consider you creditworthy overall. Depending on where you start, it may take months or even years to build or rebuild a higher level of creditworthiness.
How Creditworthiness Is Measured
|Creditworthiness Level||Credit Score|
|Fair / Limited||640-699|
Interestingly enough, while 850 is the highest credit score you can get, you can think of yourself as having perfect credit if your score is 800 or higher. Once you join the 800+ club, improving your credit score further probably won’t help you save more money.
But until you reach that point (and even after you get there), you should try to become increasingly responsible in every area of your financial life as your creditworthiness will not be solely based on your credit score. Your income and how you handle your expenses play a role, too. In particular, you need to pay your bills on time.
You can see how good your credit score is right now as well as the best way to improve it moving forward by signing up for a free WalletHub account. In addition to free daily credit scores and reports, WalletHub also offers free personalized credit analysis that will tell you how to improve your score and how long it will take. You can find some helpful tips below, too.
How to Improve Your Creditworthiness
- Automate your payments. Missing a payment, whether on a credit card or a loan, adds negative information to your credit report and brings down your credit score. Setting up automatic billing ensures you’ll never be late on a payment.
- Keep your credit utilization low. Using too much of your credit limits signals to lenders you are stretched thin financially. Aim to keep a credit utilization ratio below 30%.
- Avoid closing unused accounts. When you close unused accounts, it lowers the total available credit you have across all of your accounts. As a result, closing accounts can cause your credit utilization ratio to increase, in addition to potentially shortening the length of your credit history in the eyes of future lenders. Both of these things could negatively affect your credit score. It’s worth keeping an account open, especially if there’s no annual fee, just for the positive account information that is sent to the credit bureaus.
- Don’t open new accounts too often. Applying for new credit cards too often tells lenders you are desperate to borrow. If you apply for a card and get rejected, consider waiting at least 6 months before applying for another card.
- Check your credit report and score. Checking your credit report and credit score often can help you spot and fix errors quickly. You can check both for free on WalletHub.
To learn more, check out WalletHub’s guide on how to improve your credit score.