When you take out a loan or line of credit, the lender extending you that credit is taking a risk. As you know if you’ve ever loaned a friend or family member a quick $5 (or $500), once money has been lent, it might not ever be seen again.
Creditworthiness is the measure a lender uses to determine how big of a risk a certain borrower might be, depending on their past behavior with credit. You’re probably familiar with your credit score, which is one part of your creditworthiness, but it’s not the whole picture.
Let’s dive into the nitty-gritty of how creditworthiness is determined and why it’s important.
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.
Creditworthiness is possible to improve, but doing so takes dedicated effort.
Why Does Creditworthiness Matter?
Creditworthiness is important because these days, you simply need credit to get by. 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 improve 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 improving and maintaining.
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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. 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 (579 and below) 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 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 boost 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 improve 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—though 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. Although other websites might have catchy jingles, the only 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 for opening a certain bank account, credit card, or money-tracking app like SoFi Insights, as well as any time a lender makes a hard inquiry into your credit.
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.
Although it may sound counterintuitive, a credit card can actually help you improve your creditworthiness—as long as you use it responsibly.
For a limited time, new credit card holders† who also sign up for a SoFi Checking and Savings with direct deposit can start earning 3% cash back rewards on all eligible credit card purchases for 365 days*. Offer ends 12/31/23.
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Promotion Period: The Program will be available from 10/1/22 12:01 AM ET to 12/31/23 11:59PM ET
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Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
SoFi’s Insights tool offers users the ability to connect both in-house accounts and external accounts using Plaid, Inc’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score provided to you is a Vantage Score® based on TransUnion™ (the “Processing Agent”) data.
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