Creditworthiness is a word that is used very frequently in the financial world and it also plays a very major role in making many important financial decisions. Lenders will evaluate your creditworthiness whenever you apply for new credit before granting you such credit. A new credit may be a personal loan or any type of credit card. Credit is extended to only those borrowers, whose creditworthiness, a bank is satisfied with. If a bank or financial institution believes that the creditworthiness of the applicant is not satisfactory, they will reject his application for new credit.

What is Creditworthiness and How Can it be Determined

But do we know what creditworthiness is? Why is it considered so important before approving a credit application? What are the factors on the basis of which creditworthiness is determined? This article will discuss what creditworthiness is, its importance, and the factors that determine an individual’s creditworthiness.

What is Creditworthiness?

Creditworthiness is a valuation that is performed by the lenders i.e., banks and other financial institutions that help them in determining whether you will make default in repaying your debts or not. It helps them in analyzing how responsible you would be for new debt. This is a factor that credit card issuers look for before issuing you a new credit card. By studying this report, lenders can easily determine your borrowings and how well have you managed in repaying those borrowings.

How can creditworthiness be determined:

Banks and other financial institutions look at various factors before determining your creditworthiness. Each of these institutions has its own factors in determining an individual’s creditworthiness. But there are some basic factors that each institution takes into consideration for determining an individual’s creditworthiness. The factors are –

Information from your application:

When you apply for a credit card, you provide the credit card issuers with a lot of information which includes your name, address, annual income, your current debts, etc. Credit card issuers can hence use these pieces of information and documents to have an idea of your creditworthiness. They also consider the fact that from where will you be able to repay your debts after meeting all your living expenses. This is the reason that they have a deep study of your income and try to understand your overall debt payments.

The lenders calculate the debt-to-income ratio by using your debt and income figures. The debt-to-income ratio measures the percentage of your total income that is spent on repaying the debt obligations. The lower the Debt-to-income ratio, the more creditworthy you are. If you have a higher debt-to-income ratio, there are chances that your credit card application might get rejected because you will be considered less creditworthy.

Credit Scores:

A credit score is another important factor that credit card issuers consider to determine your creditworthiness. Many credit card issuers check your credit scores to evaluate you on the basis of your debt repaying history. Some issuers may even require you to have a credit score above a particular point in order to enable you to qualify for a particular bank’s credit card. The higher the credit score, the more creditworthy you are.

Rating Credit Score Range
Exceptional 800-850
Very Good 740-799
Good 670-739
Fair 580-669
Poor 300-579

Since credit scores are the most important point in determining your creditworthiness, hence you should always keep on trying to improve your scores. The credit score can be improved in the following ways-

(i) You should try to pay all your bills on time.
(ii) Do not opt for a new credit card or a new loan if you do not need it
(iii) Try to keep your debts as low as possible

Also Read:7 Ways to Increase Your Credit Score

Credit Report:

Your credit scores are determined from your credit reports. Hence a detailed study of your credit reports is equally important to determine your creditworthiness. The credit report contains all the data related to your past obligations as well. The card issuers can have a look at your previous history as well to determine your creditworthiness.

Why is determining creditworthiness important:

Creditworthiness is a tool that is used to measure an individual’s repaying capacity. If a lender will just provide someone with credit without checking his/her creditworthiness, the credit holder may default payments and it can prove to be extremely risky for the lender. Hence it is thoroughly checked before approving or rejecting a credit card application. The better the creditworthiness of an applicant, the more are the chances of getting his credit card application approved.

Bottom Line

Now that we have clearly understood what is creditworthiness, why is it important, and what factors determine an individual’s creditworthiness, it is our own responsibility to improve and maintain it if we are going to apply for a new credit card in the near future. Maintaining creditworthiness will not only help you in getting qualified for various credit cards but it will also help in opening the options of those credit cards which offer the best benefits, great reward points, lower interest rates, and larger credit limits.

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