To be creditworthy means you are considered suitable to access credit, whether that means you’re getting a loan or a line of credit (such as a credit card). You have proven that you have managed debt responsibly in the past and are likely to do so again in the future.
In other words, lenders see you as not a risky borrower who might be late with payments or default on your debt. You appear to be someone who will make payments on time and pay off what you owe.
Here, you’ll learn important intel about how creditworthiness is determined (it’s more than your credit score) and why it’s important.
Key Points
• Creditworthiness measures the likelihood of timely debt repayment, impacting loan and credit card terms.
• Factors affecting creditworthiness include payment history, debt amount, credit history length, credit mix, and new credit applications.
• Building creditworthiness involves timely payments, reducing debt, maintaining old accounts, and avoiding frequent new credit applications.
• Strong creditworthiness can lead to better loan terms, higher credit limits, and lower interest rates.
• Creditworthiness can influence employment opportunities, as some employers review credit reports during the hiring process.
What Is Creditworthiness and Why Does It Matter?
In short, a consumer’s creditworthiness is what lenders assess to hedge their bets that the borrower won’t default on — fail to repay — a loan.
You can think of creditworthiness a bit like a report card for borrowers. Like a report card, your overall creditworthiness is composed of a variety of factors, each of which is weighted differently. The factors are calculated into an overall credit score, which is a bit like a grade point average (GPA).
Like a report card, your creditworthiness gives lenders a snapshot of your historical behavior — and although your past doesn’t always predict the future, it’s the main information creditors have to go on about how much of a risk you might be.
It’s possible to build creditworthiness, but doing so takes dedicated effort.
Why Does Creditworthiness Matter?
Creditworthiness is important in an array of ways. It’s not just about credit cards. Your creditworthiness will be assessed if you ever take out an auto loan or mortgage, or if you’re just signing a lease on a rental property. Your credit report might even be pulled as part of the job application process as an indication of your level of personal responsibility.
What’s more, higher creditworthiness tends to correlate with better loan terms, including higher limits and lower interest rates. Lower creditworthiness can mean you’re stuck with higher interest rates or extra fees, which, of course, make it more difficult to make on-time payments, get out of debt, and otherwise positively impact your creditworthiness for the future. A low enough level of creditworthiness may preclude you from qualifying for the loan (or lease, or job) altogether.
In short: Creditworthiness is really important for just about everyone, and it’s worth building and maintaining.
Recommended: Understanding Purchase Interest Charges on Credit Cards
How Is Creditworthiness Calculated?
So what specifically goes into the definition of creditworthiness?
That depends on whom you ask. Which factors will be most heavily weighted to determine your creditworthiness change based on what kind of credit or loan you’re applying for.
A credit card issuer, for example, may look specifically into your experience with revolving debt, while a mortgage lender may be more concerned with how you’ve handled fixed payments like installment loans.
While each lender will have its own specific criteria and look into different things, one of the most common measures of creditworthiness is a FICO® Score — the three-digit credit score based on information reported by the three main America credit bureaus, Experian®, Equifax®, and TransUnion®.
It’s important to understand that lenders will see more than just a three-digit FICO Score, which ranges from 300 to 850. The credit report they pull may also include specific information about your open and closed accounts, revolving credit balances, and repayment history, as well as red flags such as past-due amounts, defaults, bankruptcies, and collections.
Lenders may also take your income and the length of time you’ve worked at your current job into consideration, as well as assets (like investments and properties) you own.
You may already know that credit scores range from poor (300 to 579) to exceptional (800 to 850). But those scores are underpinned by a specific algorithm that takes a variety of different historical credit behavior into account.
Specifically, your FICO Score is calculated using the following data points, each of which is weighted differently:
• Payment history, 35%: The single most important factor determining your credit score is whether or not you’ve consistently paid on your loans and credit lines on time.
• Amounts owed, 30%: This factor refers to how much of your available credit you’re currently using. Having higher balances (also known as your credit utilization) can indicate more risk to a lender, since it may be more difficult for someone with a lot of debt to keep up with paying a new account.
• Length of credit history, 15%: Having a longer credit history gives lenders more context for your past behavior, so this factor is given some weight in determining your credit score.
• Credit mix: 10%: This factor refers to how many different kinds of credit you have, such as installment loans, credit cards, and mortgages. It’s not necessary to have each, but having a healthy mix can help build your score.
• New credit, 10%: Applying for a lot of new credit recently can look like a red flag to lenders, so having too many hard inquiries can ding your score.
Recommended: What Is a FICO Score and Why Does it Matter?
Building Creditworthiness
If you have a low credit score or a number of negative factors on your report, you may feel overwhelmed at the prospect of changing your creditworthiness for the better. But the good news is, it is possible to positively impact your credit score and build your overall credit profile. It just takes time, dedication, and persistence.
Given the importance of payment history, making on-time payments is usually the most important thing you can do to build your credit score.
Because the amount of revolving debt you have is an important metric, reducing your overall debt can help, too — and will free up more money in your budget to put toward other financial goals.
If you’re working to pay off certain credit cards, it may not be best to close them once you’ve stopped using them. Keeping them open will help increase the overall length of your credit history. However, you may need to charge (and then pay off) a nominal amount each month to keep the card issuer from closing the account due to inactivity.
You may want to use that credit card for one low monthly bill, such as your Netflix subscription, and pay it off in full each statement cycle.
It’s also a good idea to check your credit report at least once a year. The Fair Credit Reporting Act requires that the three big credit bureaus provide you with a free copy of your credit report once every 12 months; you may find them available weekly as well. The free credit report source authorized by federal law is AnnualCreditReport.com.
These reports don’t include your credit scores, but you’ll still get the opportunity to assess your report for fraudulent items and dispute them. You may also be able to get your credit score for no charge as a perk from your financial institution or your credit card issuer. See what’s available.
Recommended: Breaking Down the Different Types of Credit Cards
The Takeaway
Creditworthiness is the measure by which a potential lender assesses how much of a risk it’s taking by offering you a loan or line of credit. Building your creditworthiness and maintaining it is important for ensuring you have access to loans, credit cards, and even employment opportunities. Being creditworthy can help you snag lower rates and more favorable terms, whether you are shopping for a home loan or new credit card.
Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.
FAQ
Why is creditworthiness important?
Creditworthiness measures how likely you are to repay debts and do so on time. It lets lenders know you handle debt responsibly, and it may encourage them to offer you better terms when extending you credit.
What is creditworthiness most affected by?
Your payment history is the single biggest contributor to your credit score at 35%. This reflects how well you have paid debt on time in the past.
What are 3 reasons credit is important?
Creditworthiness is important because it shows you have good financial management habits, it shows potential lenders that you are a good candidate for loans and revolving lines of credit, and it can encourage them to offer you favorable rates and terms.
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