If an individual has not received approval for a personal loan even after several attempts, it could be because the person does not possess the creditworthiness needed for approval. Knowing the meaning of creditworthiness can help you avoid future problems when you apply for an immediate personal loan.
While lending money, lenders usually want to know whether or not the borrower is credit-worthy. In simpler terms, they want to know if the borrower is capable of paying the amount back on time. Let us understand the meaning of creditworthiness and how you can improve this important metric.
What is Creditworthiness?
Creditworthiness is the lender’s appraisal of the ability and willingness of the borrower to repay the loan amount. A borrower who is considered creditworthy is someone lenders regard as able, willing, and responsible enough to ensure loan repayment as agreed.
Factors Determining Creditworthiness
To understand your creditworthiness, lenders typically look for proper evidence that your income is sufficient to cover the loan payments. They also look for proof that you are paying your bills timely and managing credit card debt responsibly. They leverage available information to determine your creditworthiness.
- Credit Reports: Detailed credit reports provided by reliable lenders like Stashfin log your ongoing debts and information about credit accounts you have closed or paid off in the past decade. Payments on these credit accounts are also logged, marked as paid X days late or paid on time. On-time bill payments are perceived as a sign of creditworthiness.
- Credit Score: Different credit scoring systems, like the FICO score, evaluate the content of your credit report to understand how likely you are to repay a loan. These predictions are depicted in the form of a 3-digit credit score, typically between 300 and 850. A higher credit score indicates minimal risk of default while depicting greater creditworthiness.
- Income: As you apply for an immediate personal loan or any other form of credit, the lender usually asks for proof of income with the latest tax returns, pay stubs, or other evidence to understand that you have access to ample cash to repay the loan amount.
Factors that are used for evaluating creditworthiness can also change over time. As your income improves and you continue to manage credit responsibly, creditworthiness can also improve.
What is the Importance of Creditworthiness?
When you are considered creditworthy, it becomes easier to borrow funds or obtain credit to purchase goods or services that you cannot otherwise pay through cash. Creditworthiness is particularly useful for financing major purchases, like a home, a car, or a college education.
Every lender has specific requirements you are expected to meet to qualify for credit. At the same time, they also recognize certain levels of creditworthiness of the borrowers. With the help of a common method known as Risk-based Pricing, lenders usually offer their best borrowing terms, the lowest possible fees, and interest rates to borrowers who appear creditworthy. Other qualifying borrowers might be charged a higher interest rate or fee due to less creditworthiness.
Eventually, lenders match the products and interest rates to borrowers with any credit score range chosen.
- Exceptional: 800 to 850
- Very Good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
Creditworthiness is not just about getting lower interest rates and fees while borrowing funds. It also helps with:
- Insurance: In most places, auto insurers leverage credit scores to set your premiums.
- Renting: Landlords often consider credit checks to analyze the reliability of the borrower while deciding how large the security deposit should be.
- Utility: Utility companies also execute credit checks before allowing you to use lease equipment or any account.
- Employment: Potential employers go ahead and check credit reports as an integral part of the pre-hiring background-checking process.
Checking Your Creditworthiness: Important Steps
Usually, lenders leverage the same information while evaluating your credit application to determine your creditworthiness:
- Credit Score: You can check your credit score with the help of reliable providers like Stashfin. Stashfin allows you to check your CIBIL report while monitoring your financial health on a single platform.
- Credit Report: You can check your credit reports as well on Stashfin to learn about detailed performance and meaningful insights.
- Available Income: Lenders want to know whether or not you have a reliable income, you have ample savings or investments, or you are retired or working full time. However, they are more concerned about how much money is available monthly after you have paid off your financial obligations. This is calculated with the help of DTI (Debt-to-Income Ratio). The lower is the DTI, the higher is your creditworthiness.
Ways to Improve Creditworthiness
Improving your income and boosting your credit are both methods that lead to greater creditworthiness. However, it can be a gradual process. Some useful ways to improve creditworthiness are:
When you ensure timely debt payments every month, it will promote improvement in your credit score while preventing you from expensive late fees.
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Reducing Debt and High Credit Card Balances
The lower your outstanding credit card balances, the greater your creditworthiness. A balance that exceeds around 30 percent of the borrowing limit of a credit card can negatively impact your credit score. Reducing your outstanding debt also helps minimize the DTI.
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Considering a Variety of Credit
You can improve your credit score by revealing that you are capable of managing multiple credit forms responsibly. This could include a mix of installment loans (like personal loans, car loans, and student loans) and revolving credit accounts, like credit cards.
Conclusion
Creditworthiness is a type of trust. It can take some time to earn creditworthiness. However, when you nurture it and practice effective credit habits, it becomes easier to improve your creditworthiness.
