Your creditworthiness is a measure of how “worthy” you are of being a borrower. If you are considered creditworthy to potential lenders, that means they believe you are reliable enough to pay off your debt without any issues. Your FICO®Scores are three-digit numbers that represent your creditworthiness. The higher your credit scores, the more creditworthy you are, and the more likely you are of being approved for loans and credit that can help you make significant life transitions in the future.
How to Check Your Creditworthiness
The main people interested in checking your creditworthiness is anyone considering loaning you money or credit you have to make payments on. This includes an apartment, a credit card, a car loan, a mortgage, etc.
How do lenders check your credit score? Well, checking your creditworthiness means checking your credit scores and credit reports. Your credit scores are calculated using data from your credit reports, which contain your credit history. Your credit history is your track record of how you’ve done in repaying your debt on time. Your credit reports and credit scores are created by the three major credit bureaus —Experian®, TransUnion® and Equifax®.
These three agencies are the gatekeepers of your FICO ®Score. Their purpose is to:
- collect your credit activity from lenders
- create your credit reports
- calculate your credit scores from the data in your credit reports
- set the standard for what we consider “good” versus “bad” credit.
Lenders and creditors pay these credit bureaus for your credit reports to get insight on your credit history before they decide whether to approve you for the loan.
How Lenders Determine Your Creditworthiness
As we mentioned earlier, lenders base their decisions to loan or not to loan you money based on the health of your credit history. In other words, they need evidence that you pay your bills on time, have a credit history and a good track record. More specifically, here’s what lenders typically evaluate:
Credit Reports.
Your credit report is kept current by the three credit bureaus listed above, and it accounts for your credit history for up to 10 years. Credit reports contain an exact list of all your outstanding debt, including any credit card accounts, private loans, federal loans and so on.
Credit reports also include a list of any past debts in the form of closed and settled accounts. Notes on your payments are included as well. Whether you missed a few payments, made every payment on time, paid late, etc., it can be found on your credit report.
Additionally, foreclosures, accounts in collections, vehicle repossessions and bankruptcies can show up on your credit report as well.
Credit Scores.
Lenders can also review your current credit scores. Your credit scores are three-digit numbers that summarize all the information in your credit reports. Think of it as a grade for your credit history, which provides a quicker way of giving lenders an idea of your creditworthiness. The higher your credit score, the less of a risk you are, which makes you “creditworthy”.
FICO® reports its scores are used by 90% of lenders to check your creditworthiness. FICO® Scores are calculated using different components of your credit reports.
This data is grouped into five different categories:
- Payment history (35%)
- Credit utilization (30%)
- Length of credit history (15%)
- Credit mix (10%)
- New credit (10%)
It helps to know how your credit scores are calculated because it gives you an idea of what to work toward to meet your financial goals. Your credit score may fluctuate and even fall into the lower rankings at some point in time. However, there are several ways to positively impact your creditworthiness.
What Positively Impacts Your Creditworthiness
Here are the two most critical ways to help your creditworthiness:
Pay in Full and on Time.
Your payment history is the largest factor that affects your credit score. This means that the best way to improve and maintain your creditworthiness is to pay your bills on time. It’s even more important to get your accounts current if you’ve fallen behind on payments. To help with this, consider setting up a budget to make sure you’re prioritizing responsibilities and not getting into unhealthy levels of debt.
Keep Your Credit Utilization Below 30%.
Your credit utilization is the portion of your credit limit that you’re currently using. If you keep maxing out your credit cards, for instance, it shows you’re relying on credit too much and may have a hard time repaying your debt. The general consensus is to keep your credit utilization below 30%. So, if you’re credit limit is $1,000, then keep the amount of credit you use at or below $300. Some experts even suggest that your credit score can start taking minor dips as soon as your credit utilization reaches 20%. Regardless of the number, however, the main idea is to keep your debt manageable. Don’t rely on it too much and make your payments on time.
Open a Credit Card.
If you have little to no credit history, one of the best ways to positively impact your creditworthiness is to open a credit card account. If you can show you are reliable with a credit card, you may begin seeing your credit score positively impacted, which can give you access to higher credit limits and better loan terms in the future.
Why Your Creditworthiness Matters
Your creditworthiness determines whether you can borrow funds in the form of a loan or mortgage, or open and use a line of credit via credit card companies. While you shouldn’t be using your credit cards for everything, especially if you’re unable to pay them in full each month, your creditworthiness is most crucial for more significant life events.
For example, financing for higher education, taking out a business loan, buying or leasing a car, taking out a homeowner’s loan and of course, for emergencies. When the time comes for a big life event, not having creditworthiness can hold you back significantly. It’s time to take control of your creditworthiness.
Be prepared and know your creditworthiness with credit report monitoring, identity monitoring, identity theft insurance and more. This can help you work toward better credit health.
