Creditworthiness is a measure of how risky a person is as a borrower, largely based on the individual’s credit history and ability to pay. Whenever a potential borrower applies for a loan or line of credit, the lender may consider several key aspects of the applicant’s profile that collectively comprise that person’s overall creditworthiness. The most important components of creditworthiness are the applicant’s credit history, income, debts already owed, and other major financial obligations.
In general, the more creditworthy you are, the more trustworthy lenders will consider you to be. As a result, you’re more likely to be approved for better credit cards and loans.
The exact definition of creditworthiness can vary a lot depending on the context, though. 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.
The easiest way to get a better sense of your creditworthiness is to check your latest credit score for free on WalletHub. WalletHub is the only site with free credit scores and reports that are updated on a daily basis.
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 such as open loans and lines of credit, balances, credit limits, payment history, credit inquiries and public records.
- Credit Score – Creditors may consider a version of 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 will be obligated to pay in the future. They are not necessarily debts, but they are any agreements that will reduce the amount of money you have later on.
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 credit card, for example, doesn’t mean you’re qualified for another. 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. First and foremost, that means paying 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 a free personalized credit analysis that will tell you how to improve and how long it will take.