What Is Creditworthiness and Why Does It Matters?

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What Is Creditworthiness?

Creditworthiness is defined as a metric that gauges how well you have managed your credit as well as debt obligations thus far. By way of analysing your credit report, a creditor can gauge your repayment history. Based on your creditworthiness, the borrower will decide whether or not to approve your loan request. By making your payments on time, and not defaulting, you can ensure that you maintain and improve your creditworthiness.

Checking Your Creditworthiness

Now that we have shed light on the creditworthiness meaning, we shall delve further into who measures your creditworthiness. There exist three main credit reporting agencies that gauge the creditworthiness of a borrower, namely – Equifax, Experian, and TransUnion. These agencies are paid by the lenders to access the data of customers, and make use of their systems of credit scoring in order to grant approval for lending credit.

For example, if Ajay has a CIBIL score of 700, he is deemed to be highly creditworthy. Thus, if he applies for a loan, he can be granted ₹50,000 at an interest rate of 11%. If Bharat has a CIBIL score of only 600, he is deemed to be less creditworthy. Thus, if he applies for a loan, he will be offered a lesser amount, of say ₹ 10,000, at a higher rate of interest of 20%. Thus, over time, Bharat will have to pay more interest compared to Ajay.

Thus, it is vital that you keep a track of your CIBIL score, as it is the deciding factor when it comes to seeking a loan. It contributes towards deciding how much loan amount you will be approved for, as well as the rate of interest applicable. To keep a track of your credit score, you can make use of free credit monitoring websites such as Credit Karma or Credit Sesame (the latter being the best source at the moment).

What Factors Determine Creditworthiness?

Creditworthiness is determined by a range of factors. Elucidated below are the same:

Repayment History:

The creditworthiness of a borrower is determined, to a great extent, by their timeliness of payments – when it comes to credit card bill payments and loan repayments. If you default on a payment or delay in the same, it can adversely affect your CIBIL score.

Additionally, if you take a longer time to repay your outstanding dues, and if the number of your unpaid bills piles up, your credit score will fall. Your repayment history contributes to 30% of your credit score. Hence, you must make sure that you repay your dues on time, and do not default on the same.

The Utilisation of Credit:

Another important factor that determines your creditworthiness is your credit utilisation. This factor makes up 25% of your credit score. Additionally, if a certain borrower showcases poor spending habits, like ending beyond your means, can also result in a higher ratio of credit utilisation, which can bring down the credit score. When it comes to sanctioning a loan, lenders tend to view a higher rate of credit utilisation as a negative indicator of a consumer’s financial behaviour.

The Number of Credit Inquiries:

Before approving a loan request, all lenders necessarily check a borrower’s credit report to assess if there is a new enquiry, new loan request, or a new credit card request. This is a deciding factor, as it helps determine the repayment ability of the borrower. If a borrower applies for multiple loans or credit cards on a routine basis, this is a sign that the borrower may not be able to meet the repayment terms and conditions set by the lender. If you, as a borrower, make multiple and frequent credit inquiries, your credit score can be impacted by up to 20%.

Credit History Length:

If you have a long, and stable credit history, it has a positive impact on your credit score, and makes accessing a loan much easier for you. All lenders in the market will be more than willing to approve loans to you if consistent repayment history, over a long duration. Thus, it is advisable to not close old credit cards, even if not used that much and to keep them active to maintain your credit score.

Credit Mix:

Before approving a loan, a lender will typically check your credit mix of both unsecured and secured loans. Secured loans refer to loans wherein you must offer assets as collateral, such as home loans and car loans. Unsecured loans are loans that do not need any collateral, such as personal loans.

The Importance of Creditworthiness

Even if you do not have any plans of applying for a loan or a new credit card in the near future, maintaining and constantly improving your CIBIL score is a must.

Apart from financial institutions, a range of other sectors, such as cable providers and even certain cell phone carriers will factor in your creditworthiness.

By maintaining a good CIBIL score, consistently, you can ensure that come what may, in the future when you need to avail of financial and non-financial services, you do not face any restrictions.

To keep a regular check of your credit score, you can make use of free websites such as Credit Karma, Credit Sesame, and WalletHub.

How to Improve Your Creditworthiness ?

If you wish to improve your creditworthiness, follow the steps elucidated below:

You must first start by tackling all accounts that are past due, as well as all debt collections. If you manage to pay these off, your credit score will improve dramatically.

Ensure that moving forward, you make all your payments on time. If you do not have an active account, you may wish to add another credit card, which will vastly improve your creditworthiness.

When it comes to outstanding loans, try your level best to make bigger down payments. This translates to the lender taking on lesser risk, and can hence help you get approved for a car loan or even a mortgage, in spite of average credit scores.

If you wish to increase your chances of getting approved for a loan, having a co-signer can help. If you default on the payment of your loan, this co-signer is responsible for completing the payments on your behalf.

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