Creditworthiness

Creditworthiness
Creditworthiness is a description of an individual’s credit health and history.

What is Creditworthiness?

Creditworthiness is a concept that illustrates what kind of risk a lender might associate with a borrower. Lenders and creditors review a potential borrowers’ creditworthiness to gauge how risky it would be to lend that person money. Creditworthiness is also a major determiner of the interest rates that borrower might be charged.

How is Creditworthiness determined?

Creditworthiness is determined primarily by a person’s credit score. Lenders may also consider, credit history, age, income, employment, existing debt, and types of debt. Factors such as a person’s credit score and repayment history are used to determine how likely they are to make on-time payments, make late payments, or default on loans.[1]

Creditworthiness will not only impact financial opportunities made available to a borrower, but may also affect one’s ability to be hired by certain companies, insurance premiums, and, in some cases, the opportunity to be certified or licensed in certain professional arenas.

What is a credit score?

Your credit score is a numerical depiction of your creditworthiness. If your credit score is high, you have a high level of creditworthiness, and alternatively, a low credit score is equated with lower levels of creditworthiness. The Fair Isaac Corporation created the FICO score, which is the most commonly used credit score today.

Scores can range from 300 to 850; the higher your score is, the more creditworthy you are considered to be. Your credit score is arrived at through the evaluation of multiple factors, such as how much debt you’re carrying as well as whether or not you make payments on time.

A credit rating is a way to assess creditworthiness. Credit ratings are primarily applied to governments and businesses, while credit scores are used for individuals. Just as your creditworthiness is assessed when borrowing money, the credit history of countries and businesses is similarly evaluated. While credit scores usually range from 300 to 850, the credit rating scale is from AAA (excellent) to C and D.[2] The largest credit rating agencies include Standard & Poor’s, Moody’s, and Fitch. You can think of these agencies as being similar to TransUnion, Equifax, and Experian, but working with credit ratings instead of credit scores.

Knowing what information goes into factoring your credit score the first step in ensuring your creditworthiness remains healthy. A person’s creditworthiness can be improved, but it can be a slow process. We suggest always trying to make payments on loans or credit cards on-time—that’s a great way to start to improve your creditworthiness.

What is credit history?

The three major credit bureaus (TransUnion, Equifax, and Experian) keep records of consumer credit usage and accounts in what’s called a credit report. A credit report is simply the written record of one’s credit history. Credit histories (found in credit reports) will contain information on open and closed credit accounts, credit inquiries, derogatory marks, and on-time payment histories.[3]

Your credit history will not contain information on your checking and savings accounts or any personal information such as your income, race, or age.

The information in your credit report and credit history comes from lenders, collection agencies, and public records such as bankruptcies and liens.[4] A credit report can be requested by lenders, landlords, and employers. It is used to make decisions related to borrowing, employment, insurance, and other purposes allowed under federal law.

What is my Creditworthiness?

The first step to improve your creditworthiness, is to know what it currently is.

Under the Fair Credit Reporting Act you have many rights,[5] including the right to a free credit score. You also have the right to be told if information in your file has been used against you, the right to deny employers access to your credit file, and the right to seek damages if a credit bureau violates your protections. The Federal Trade Commission offers a complete list of your rights.

To see what’s in your credit report, request your credit report through the government’s sanctioned site at www.annualcreditreport.com. You are entitled to a free credit report once a year from the three major credit bureaus.

Under law, credit bureaus can only share your information with others in the event of a legitimate need. People who might qualify to see your report based on this include insurers, creditors, landlords, and employers.

If you notice errors in your credit report you should, in writing, inform the credit bureau that’s reporting them. Under law, credit bureaus are required to investigate them in a timely manner—usually within 30 days. For more information, check out the Federal Trade Commission’s step-by-step instructions for disputing credit reporting information.

How can I improve my Creditworthiness?

You can become more “creditworthy” by improving your credit score. This can be done over time by adopting more responsible credit, borrowing, and spending habits. Generally, the first step to take is to get up to date on all of your bills. If you have outstanding debts, pay them. Also, maintaining a low balance on your credit card, making on-time repayments on bills and installment loans will improve your credit score, and—creditworthiness—overtime.

References:

  1. “Creditworthiness”. Investopedia. http://www.investopedia.com/terms/c/credit-worthiness.asp. Accessed September 26, 2016.

  2. “Credit Rating”. Investopedia. http://www.investopedia.com/terms/c/creditrating.asp. Accessed September 26, 2016.

  3. “What Is Your Credit History?” Credit Karma. https://www.creditkarma.com/article/What_is_your_credit_history. Accessed September 26, 2016.

  4. “What Is a Credit Reporting Company?” Consumer Financial Protection Bureau. Accessed on October 12, 2016, at http://www.consumerfinance.gov/askcfpb/1251/what-credit-reporting-company.html.

  5. “A Summary of Your Rights Under the Fair Credit Reporting Act.” Federal Trade Commission. Accessed on October 12, 2016, at https://www.ftc.gov/sites/default/files/documents/one-stops/credit-reporting/pdf-0096-fair-credit-reporting-act.pdf