Creditworthiness: How to Check and Improve It

What Is Creditworthiness?

Creditworthiness is a measure of how likely you will default on your debt obligations according to a lender’s assessment, or how worthy you are to receive new credit. Your creditworthiness is what creditors consider before they approve any new credit.

Understanding Creditworthiness

Your creditworthiness tells a creditor just how suitable you are for the loan or credit card application that you filled out. The decision that the lender makes is based on how you’ve dealt with credit in the past. Lenders periodically review different factors: your overall credit report, credit score, and payment history.

Your credit report outlines how much debt you carry, the high balances, the credit limits, and the current balance of each account. It will also flag any important information for the potential lender, including whether you’ve had any past-due amounts, defaults, bankruptcies, or collection items.

Your creditworthiness is also measured by your credit score, which is a three-digit number based on factors in your credit report. A high credit score means your creditworthiness is high, while a lower credit score indicates lower creditworthiness.

Payment history also plays a key role in determining your creditworthiness. Lenders generally don’t extend credit to someone whose history demonstrates late payments, missed payments, and overall financial irresponsibility.

If you’ve been up to date with all your payments, the payment history on your credit report should reflect that. Payment history counts for 35% of your FICO credit score, so it’s a good idea to stay in check, even if you have to just make the minimum payment.

Your creditworthiness is important because it will determine whether you get approved for a new loan, like a car loan or a credit card. The more creditworthy you are, the more likely you will be approved for better interest rates, which can save you significant money. It can also affect employment eligibility, insurance premiums, business funding, and professional certifications or licenses.

Checking Your Creditworthiness

The three prominent credit reporting agencies that measure creditworthiness are Equifax, Experian, and TransUnion. Lenders pay credit reporting agencies to access credit data on potential or existing customers in addition to using their own credit scoring systems to grant approval for credit.

Every consumer should keep track of their credit score because it is the factor used by financial institutions to decide if an applicant is eligible for credit, preferred interest rates, and specific credit limits.

You can request a free copy of your credit report once each year at AnnualCreditReport.com, or you can join a free credit monitoring site like Credit Karma, Credit Sesame, or another credit monitoring service.

How to Improve Your Creditworthiness

There are several ways that you can improve your credit score to establish creditworthiness. First, you can pay your bills on time. Then, you can pay more than the minimum monthly payment to pay down debt faster and improve your credit utilization ratio. Some financial experts suggest keeping credit card utilization rates below 30%, although 10% is ideal.

You should understand your debt-to-income (DTI) ratio. An acceptable DTI is 35%, but 28% is ideal. DTI can be calculated by dividing your total monthly debt by your total gross monthly income. Lenders use DTI when assessing an individual’s creditworthiness.

You can also order a free copy of your Equifax, Experian, and TransUnion credit reports. Review all of the information for accuracy, and dispute any errors. Provide supporting documentation to substantiate your dispute claim. In addition, you can dispute inaccurate information with the company reporting the error.

The Bottom Line

It’s important to understand your creditworthiness, even if you are not applying for credit. You can track your credit score and credit report annually to ensure that your creditworthiness is strong. If you need to improve your credit, you can take steps such as reducing your debt and avoiding overspending with revolving lines of credit like credit cards.