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Credit Scores and Reports

What does being creditworthy really mean?

Look at the big picture to see how lenders evaluate you

Summary

Your creditworthiness is a measure of your credit score, income, debt-to-income ratio and any past financial fails you’ve experienced – and depending on what type of credit you’re applying for, the lender might want to see a some or all of those things.

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Many associate being creditworthy with having a high credit score.

But that’s just the tip of the iceberg, because “creditworthy” can mean different things to different people in different situations.

You need to know why it’s important, how lenders measure it and how you can make yourself more creditworthy.

Your creditworthiness is a measure of your credit score, income, debt-to-income ratio and any past financial fails you’ve experienced – and depending on what type of credit you’re applying for, the lender might want to see a some or all of those things.

Keep reading to learn from the experts all you need to know about what being creditworthy means and why it should be a significant part of your financial plan.

See related: What is a good credit score?

Creditworthiness gives you financial freedom

Mike LaLonde, a financial economist at Finzmo, pointed out that being creditworthy gives you a tremendous amount of financial freedom.

“It allows you to make big purchases you want or access affordable credit when you need it, so improving your score and maintaining your ability to get credit – even if you don’t use it – makes your financial situation less stressful,” LaLonde said.

Robert Farrington, millennial money expert and creator of The College Investor, said being creditworthy can get you access to competitive rates on mortgages and refinancing rates, and it also gives you greater negotiating power.

And when you’re very creditworthy, often lenders will compete for your business, Farrington said.

In addition, he pointed out that creditworthy individuals typically get lower car insurance premiums and don’t need deposits for utility companies.

“Making sure you are always creditworthy can be a saving grace should the unthinkable happen,” Chris Terschluse, head of marketing and content at Chime, said.

If you have to take out an emergency personal loan for anything from surprise medical bills to unexpected home repairs, being denied credit when you need it most could lead to a negative effect on your financial health.

“Even just being less creditworthy than someone else could cause a large purchase, such as the perfect home or car deal, to fall through,” Terschluse said.

Lenders use more than your score to measure your creditworthiness

The experts all agreed that lenders determine creditworthiness in a number of ways, not just by checking your credit score.

Rob Misheloff, CEO of SmarterFinance USA, said your credit score tells only part of the story – for example, someone with a recent bankruptcy may end up with a 700-plus score because their credit utilization (the percentage of your available credit you’re currently using), goes to zero after credit card debt is discharged.

If you’re looking to buy a house, your loan officer is going to look at your overall creditworthiness to determine if you’ll get approved for a loan and at what mortgage interest rate, according to Andrina Valdes, executive sales leader and COO of Cornerstone Home Lending.

Getting a low rate is something that motivates many potential borrowers to work on improving their credit score or keeping it in good shape, Valdes said. Even though rates are historically low right now, even one percentage point could cost you thousands in long-term interest.

Drew Cheneler, founder of the website SimpleMoneyLyfe, said that when lenders review applications they look at your income, outstanding debt, credit score and personal information, such as your tax returns, bank statements and even your renting history if you don’t own a home already.

And often, lenders will calculate a quick debt-to-income ratio, which paints a clear picture of how you handle and manage your current debt, he added.

Cheneler also confirmed that some employers review your credit report to see if you are creditworthy – and if you’re not, it could cost you the gig.

Although a credit report does not directly state your credit score, it generally reveals to employers how well you manage your money.

Many employers run a credit check on prospective employees who are about to assume leadership positions, particularly those who would be managing financial-related tasks.

“If you want keep all of your employment opportunities open, you better believe your creditworthiness is important,” Cheneler emphasized.

See related: How credit scores affect interest rates

Businesses often need to be creditworthy to stay afloat

Brock Blake, CEO and founder of Lendio, said business creditworthiness is built over time.

Business credit reports are based on business demographics, public records, trade payment history, financial payment history, corporate family trees and identifying information for each business level, and small business owners and guarantors associated with the business, Blake noted.

Business credit isn’t utilized by lenders in the same way as personal credit, but there are many instances where business creditworthiness can be helpful, Blake said.

“Business credit can get your business approved for trade credit, and if you’re building out inventory and want better payment terms, many trade vendors will also pull business credit to see if your business is worthy of a 60-day extended term,” Blake said.

And trade credit and extended terms can both assist with cash flow management and provide relief in times of need.

See related: Best business credit cards

How to improve your creditworthiness

Now that you know just how important being creditworthy is for your overall financial health, make that a priority.

To get you started, here is a list of nine things you can do to improve your creditworthiness now:

  • Pay your bills on time, every time.
  • Keep your credit card balances low to maintain good credit utilization ratios.
  • Do not close your older accounts because part of your credit score is calculated using the length of your credit history.
  • Don’t apply for credit unless you really need it.
  • If you have poor credit, get a low-limit credit card if you can, but use it sparingly and pay it off every month.
  • Consider using a free financial advisor to help you create a personal plan to pay off your debt.
  • If you’re in deep debt, think about taking on a side hustle and use all of that income to pay it off.
  • Get a copy of your free annual credit report and examine it for any errors – then act immediately to get any mistakes removed.

Chime’s Terschluse said improving your creditworthiness can take months, potentially even years, depending on the situation.

Take heed – using these tips could impact your creditworthiness in a significantly positive way.

Once you become a creditworthy person, the financial world will be your oyster.

Editorial Disclaimer

The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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