You probably have read or heard about the term “creditworthiness” many times when researching a loan or credit cards. It’s not surprising as it has a very important part of every loan application there is.
The term is pretty self-explanatory as it’s basically a term describing how worthy the borrower is off the loan as well as his or her likelihood to default on the obligation.
How Do Lenders and Creditors Get Your Information
You need to render some personal information first to qualify for a loan. This should include necessary details like your name, contact information, and address. The lender or creditor like CreditNinja Financing might also ask finance-related questions to you to better gauge your eligibility, such as your employment status and income.
After submitting your application, they will run a hard credit check that will affect both your credit report and score.
For instance, a lender might check how much debt you currently have and what your income to help them ascertain your capacity to repay the loan that you’re applying for.
What is a Credit Score?
It consists of a three-digit number ranging from 300 to 850. A high score means your creditworthiness is good. It also implies that you manage and pay your debt and obligations on time.
The biggest factor that affects it is how often you settle your bills on time. Delayed payments and other financial misconducts lessen it. As a consequence, it will be difficult for you to get approvals on loan and credit card applications.
Besides financial and debt management, the amount of debt you’re carrying is also a big factor. For example, having a high balance can make it hard for you to get loan approvals.
That being said, pay down your loan balances and keep your balances below 30% of the limit. Also, lessen your applications for a new card and only apply for new items if necessary.
What Your Credit Report Contains
It houses important personal details about you that lenders check when evaluating your creditworthiness. Apart from basic information, you’re probably wondering what else is written on the report and how you can check it out yourself.
In case you don’t know, you’re entitled to one credit report every year. The three major bureaus namely; Experian, Equifax, and TransUnion, will allow you to check your report through visiting their websites.
Know it that this report doesn’t include your credit score. But you can check it separately and for free through financial sites that provide credit score checking services. Another way to check your score is by taking a look at your current loan statements.
Below are the pieces of information that you can find in your credit report.
- Personal details such as your name, birth date, address, social security number, and phone number.
- New and old accounts information, including payment history, account balances, account types, creditors’ names, and available
- Public records like bankruptcies, foreclosures, liens, and civil suits.
- Inquiries from companies from companies that checked credit report.
- Debt collections
At this point, you’re now aware that lenders who run a hard credit check on your report can see just about everything related to your finances. All of these metrics come together so they can gauge how risky you are as a borrower.
Creditworthiness Varies
It’s important to know that it also varies depending on the type of loan you want to apply for.
For example, payday loan lenders have more lenient standards and requirements than mortgage loan lenders. The reason is that mortgage loans pose higher risks for the lenders because they involve bigger money with nothing to back them up in case the borrower defaults the loan. Good thing you can secure a loan with collateral which helps minimize the risk so you can qualify.
On the other hand, applying for a credit card is easier and have a higher approval rate, even if you have a shoddy credit history or a low score. However, when such is the case, the loan comes with a higher interest rate.
How to Improve Your Creditworthiness
To stay on top of your creditworthiness, it’s important that you monitor your score regularly. You can do so by using credit checking platforms online. These platforms will grant you access to your score and give tips on improving it.
Now, if you’re having a hard time getting approved for loans, you need to polish it. Prove to the lenders that you’ll not default on debt obligations.
Get a Credit Card
You need to build credit if in order to build your score. It doesn’t necessarily mean your card should carry to improve your score. It means you need to make purchases that you can afford to pay once your billing cycle ends.
Paying your bills in full every month will showcase your capacity to repay a debt on time, which is crucial in establishing good credit. If you can’t acquire a regular credit card, you can get a secured version from a lending institution or a bank. They can also give you a card limit that’s equivalent to the money you deposited into an account.
Be Responsible with Using Your Credit Card
Don’t max out your card and always pay your bills on time. Remember that having a high balance on your card can harm your score even if you’re paying it every month. It’s ideal to keep your monthly expenses within or less than 30% of your credit limit.
In case you exceed your limit, settle the balance right away. It must be done before your statement closing date to minimize the balance that’s going to be reported to the credit bureaus.
Apply for a Loan
Credit comes in two types: revolving and installment credit. If you want to get the best possible score, you need to build your creditworthiness with both.
Know that a credit card falls under the revolving credit type. Thus, if you don’t already have installment loans such as mortgage, car, or student loan, consider applying for a small personal loan that you can easily pay.
Stay on Top of Your Credit Report
To make sure that you don’t have any negative marks on your reports, you must regularly monitor it. If you find inconsistencies, errors, or unauthorized accounts or reports on your report, dispute them right away.
Takeaway
If you feel like there’s still room for improvement for your credit history and score, there are steps you can do to fortify them as well as your overall creditworthiness. Just put in mind that it is a loose term whose definition can vary depending on what kind of loan you’re seeking and on the lender.
While it’s difficult to determine what do lenders care about the most in your credit report and how strict they can get in terms of requirements, knowing what information they use to gauge your eligibility is the first step in increasing your likelihood in securing a loan and in improving your financial health.
