Credibility is how a lender determines that you will default on your debt obligations, or how worthy you are to receive a new credit score. Your creditworthiness is what lenders examine before approving any new credit for you.
Credit quality is determined by several factors, including your repayment history and credit score. Some lenders also consider available assets and the number of liabilities you have when determining the probability of default .
Main advantages
- Solvency is how a creditor will tell you if you will not meet your debt obligations.
- Credit quality is determined by several factors, including your repayment history and credit score.
- Improving or maintaining your credibility is as simple as making your payments on time.
Understanding credit capacity
Your creditworthiness tells a lender how suitable you are for that loan or credit card application you have filled out. The decision the company makes is based on how you’ve handled credit in the past. To do this, they look at several different factors: your overall credit report, credit score, and payment history.
Your credit report describes how much debt you carry, high balances, credit limits, and the current balance for each account. It will also flag any important information to the potential creditor, including whether you have had any overdue amounts, defaults, bankruptcies and collection items.
Your credit quality is also measured by your credit score, which measures you on a numerical scale based on your credit report. A high credit score means your creditworthiness is high. On the other hand, poor credit quality stems from a lower credit score.
Payment history also plays a key role in determining your creditworthiness. Lenders generally do not extend credit to someone whose history demonstrates late payments, missed payments, and general financial irresponsibility. If you are current on all of your payments, the payment history on your credit report should reflect this and you should have nothing to worry about. Payment history counts for 35% of your credit score, so it’s a good idea to keep track, even if you only have to make the minimum payment.
Your creditworthiness is important because it will determine whether you get the car loan or the new credit card. But that is not all. The more credit worthy you are, the better off you are in the long run, because it typically means better interest rates , lower fees, and better terms and conditions for a credit card or loan, which means more money in your pocket. It also affects employment eligibility, insurance premiums, business financing, and professional certifications or licenses.
Checking your creditworthiness
The three prominent credit reporting agencies that measure credit quality are Experian, TransUnion, and Equifax. Lenders pay credit reporting agencies to access credit data about potential or existing customers, in addition to using their own credit scoring systems to grant credit approval.
For example, Maria has a credit score of 700 and high creditworthiness. Mary gets approved for a credit card with an interest rate of 11% and a credit limit of $5,000. Doug has a credit score of 600 and low credibility. Doug gets approval for a credit card with an interest rate of 23.9% and a credit limit of $1,000. Doug pays more interest over time than Mary.
Every consumer should keep track of their credit score because it’s the factor that financial institutions use to decide if an applicant is eligible for credit, preferential interest rates, and specific credit limits. You can request a free copy of your credit report once a year, or you can join a free credit monitoring website like Credit Karma or Credit Sesame (the latter being one of the best credit monitoring services available today), which allows you to continue control of your credit history.
How to improve your creditworthiness
There are several ways to improve your credit score to establish creditworthiness. The most obvious way is to pay your bills on time. Make sure you are up to date on any late payments or set up payment plans to pay off overdue debt. Pay more than the monthly minimum to pay off debt faster and reduce late fees.
Keep credit card balances to 20% or less of your credit limit, although 10% is ideal. Check your debt to income ratio (DTI). An acceptable DTI is 35%, but 28% is ideal. DTI can be calculated by dividing total monthly debt by total monthly gross income. Lenders use the DTI when assessing an individual’s creditworthiness.
- Automatically pay your credit card . If you don’t feel confident about selecting the option to automatically pay your full credit card balance each month from your bank account, using a credit card is not for you.
- Never close your credit card account . Closing credit card accounts hurts your credit history. Instead, downgrade to a no-fee credit card and leave the account open.
- The more credit you have, the higher your score . As you feel comfortable using a credit card and always paying in full, start expanding your credit. Apply for a new card at a different bank or ask to increase your line of credit at your current bank. Your credit score will drop for 90 days, but then it will be higher than before.
You can also request a free copy of your TransUnion, Experian and Equifax credit reports. Review all information for accuracy and dispute any errors. Provide supporting documentation to substantiate your dispute claim. Additionally, you can dispute inaccurate information with the company reporting the error.
Credit quality is difficult to restore once it is lost. You will have to work hard to restore and maintain it. So make sure you follow the tips above to keep yourself under control
