Creditworthiness, also written as credit worthiness, is a person’s, company’s or entity’s ability to borrow money, i.e. the degree of certainty that they will be able to repay a loan by meeting their financial obligations.
The better your creditworthiness is, the more likely it is that a financial institution will lend you money, and perhaps also at a lower interest rate.
Our credit histories – how we met past loan obligations and how promptly we paid bills, prudent spending, and generally demonstrating that we can behave in a responsible way (financially) – establishes our creditworthiness.
An individual’s creditworthiness is also influenced by his or her income, age, current debts, expenses, and future job/career opportunities. Banks and other lenders use this data to determine how much they can safely lend.
Credit rating agencies help determine creditworthiness
Lenders pay credit rating agencies, which monitor consumers and follow their financial activities to generate a credit score. The higher your credit score is, the better your creditworthiness.
We can increase our likelihood of getting a loan at favorable terms if we familiarize ourselves with how creditworthiness is evaluated and monitoring our credit reports for signs of negative information which might undermine our chances.
We can improve our creditworthiness by maintaining our debts within a manageable percentage of our income, and making sure bills are paid on time.
Most US lenders us the FICO Score when deciding whether to lend money to someone.
A bad credit history can be repaired
Any negative information regarding your credit history loses its impact on your overall rating with time. So, it is important to remember that even if you experienced problems in the past, it is possible to eventually erase that stain.
However, American business magnate, investor and philanthropist, Warren Buffett, said:
“Creditworthiness is like virginity. It can be preserved but not restored very easily.”
According to the Macmillan Dictionary, creditworthiness is:
“The degree to which a person, organization, or country is considered likely to pay back money that they borrow.”
Experts advise young people to start establishing their creditworthiness early on. If you have absolutely no debts, nobody will know how to rate you effectively because you have no track record. If you get one credit card and manage it responsibly, your creditworthiness will improve significantly.
When US lawmakers reached an impasse and could not agree on a federal budget, President Barack Obama said:
“Nobody wants to put the creditworthiness of the United States in jeopardy. Nobody wants to see the United States default. So we’ve got to seize this moment, and we have to seize it soon.”
The following advice comes from credit rating agency Equifax.
– Pay your bills promptly. Late payments and collections can significantly worsen your credit score.
– If you have missed a payment, get it sorted immediately and stay current.
– Do not shift debts to other accounts. Pay them off.
– If you’ve had problems, re-establish your credit history. In the long term, opening new accounts and managing them responsibly may help.
– Only apply for and open new credit accounts when you need them.
– Keep your credit cards, but make sure you manage them properly. Generally speaking, having installment loans and credit cards and meeting your financial obligations helps your credit score in the long term.
– “If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor.”
– Keep your revolving credit and credit card balances low.
– Closing unused credit cards does not help raise your credit score.
– Apply for several credit cards just to raise your available credit. This strategy could actually harm your score.
– People who have been managing credit for a short time should avoid opening many new accounts to quickly.