When you apply for any loan, lenders will review your loan application thoroughly. They will look at many factors, such as your credit score, employment details, income, and the like. Moreover, lenders will do whatever it takes to make sure you are worthy of lending some money.

Understanding Creditworthiness

Creditworthiness plays a significant role in your loan application approval. It is how a lender ascertains that you are responsible and suitable enough to lend money to. The decision a lender makes in proving that you are creditworthy depends on how well you managed your past debts. 

Most of the time, what accords to being considered creditworthy will depend on the type of loan you apply for. The increased amount of money that you would want to borrow will depend on how creditworthy you need to be. For example, some lenders, like mortgage lenders, may have higher standards than credit card issuers.

Why Does Creditworthiness Matter?

Your creditworthiness allows you to borrow funds or use credit if you need to. It is useful when funding for large purchases such as a house or a car. So, working on the factors that may affect your creditworthiness, and as early as possible, can help you with your finances.

Creditworthiness doesn't just give you the ability to borrow money. Building a good credit score can also help you with the following:

  • Some landlords review your credit status before allowing you to rent a room or an apartment.

  • Auto insurers may run a credit check when setting your premiums.

  • Utility companies tend to assess your credit status before you could borrow equipment or open an account.

  • Employers may look at your credit status as part of their background check.

Factors that Can Affect Creditworthiness

To determine if you are creditworthy, lenders will tend to do a credit check. This is done to verify how well you have been managing your past and now existing debts. The credit check usually involves the following:

  • Reviewing your credit report:

Credit bureaus are assigned to compile and maintain a borrower's credit report. A credit report enlists all of your past and now existing debts for the last ten years. 

Your monthly payments will appear on your credit report. It can include those that are paid late and on time. Moreover, debts that have been sent to collections, bankruptcies, vehicle repossessions, and property foreclosures will also appear in your credit report.

  • Checking your credit score:

Credit scores analyze your credit report and give you a statistical prediction of how you might fail to repay the loan. The prediction usually runs from 300 to 850. The lower the score, the higher the risk of loan default. This also means that a higher credit score implies greater creditworthiness.

On the other hand, lenders also tend to look at the following to assess your ability to repay a loan:

  • Income and Debt

Before a lender approves your loan application, they will tend to look at your ability to pay back the loan. The extent of a lender's verification may depend on how much you want to borrow and what type of loan you will get.

For example, credit card issuers will simply ask how much you earn. They investigate further if your credit score is below their set threshold. When it comes to personal loans and car loans, lenders may need proof of income. This includes your payroll or tax return. For mortgage loans, however, it is different. Lenders will need to examine the borrower's income, housing expenses, and monthly debts as mandated by federal law.

  • Additional Assets and Resources

In addition to income, lenders may need to look at your assets and other resources. This can either be your savings, vehicle, real estate, investments, and the like. The extra assets and resources will ensure lenders that you have other alternatives if you fail to repay the loan in the future.

How to Improve Your Creditworthiness

Improving your creditworthiness can be done by building your credit score and maintaining healthy credit reports. Here are steps you can take to improve your creditworthiness:

  • Pay your monthly bills on time.

  • Avoid high credit card balances that will hurt your credit score.

  • Avoid borrowing funds you don't need.

  • Avoid opening too many new credit cards.

  • Consider managing different types of loans at the same time.

Takeaway

Part of improving your creditworthiness is being aware of where your credit stands. You will need to check your credit score and credit report so you can know your credit status. Building your creditworthiness may take a lot of effort and time, but it will all be worth it.  

Your creditworthiness lies in the eyes of the lender. There is no universal standard that measures you as creditworthy. Creditworthiness depends on a lot of factors. This usually varies from one lender to another. Hence, it is vital to consider what a certain lender is looking for, or what they deem as creditworthy in regards to applying for a loan.