How Debt Affects Your Creditworthiness

What is Creditworthiness?

Creditworthiness refers to someone’s ability to repay money that is borrowed. Many lenders use this term as a risk assessment for borrowers. Creditworthiness standards are determined based on a person’s credit score, debt to income ratio, payment history, credit utilization, length of credit history, types of credit, and any recent inquiries. Think of creditworthiness as a trust score for lenders. 

Credit Scores, Explained

Credit scores are a reflection of a person’s ability to pay back borrowed money. Credit scores are calculated based on a number of factors including the number of accounts opened, payment history, and debt. FICO Score and VantageScore are the major scoring models to determine a person’s credit score. They are maintained by three credit bureaus, Experian, Equifax, and TransUnion. Credit scores affect someone’s ability to rent an apartment, buy or lease a car, interest rates, and potentially job opportunities. Credit scores range anywhere between  300 – 850. A credit score between 670 – 740 is considered to be “good”. The average FICO score is 717. 

How a Credit Score Indicates Creditworthiness

Many lenders, insurance companies, landlords and even employers look at a person’s credit score. It aids in their decision making determining if a person can be trusted. Lenders want to know if a person can repay loans and credit card balances. Insurance companies use credit scores to predict if a person is likely to file a claim. Landlords want to see if a person has a history of making their payments on time. Credit scores directly impact creditworthiness thus impacting financial freedom, stability, and access to financial opportunities. Even individuals who have a high income and poor credit score does not determine their creditworthiness. 

Ways to Improve Your Credit Score

Improving your credit scores requires improving your financial habits. You can start by paying your bills on time by setting up automatic payments or reminders. Even if you pay the minimum amount due, they still count as being “on time”. Secondly, you want to make sure your credit utilization is under 30%. You can do this by paying credit cards down before the statement date on the report. Also, you can increase your credit limits thus decreasing your utilization score without spending less money. Paying balances off multiple times per month can also help. Additionally, keep your older accounts open and make small purchases monthly. The age of your credit history impacts your credit score. It tells the story of how you manage credit. Lastly, diversify your credit and show lenders that you can handle multiple types of debt responsibly. Have a variation of credit cards, auto loans, personal loans, and mortgages. Only open these types of credit if it fits your needs. 

What will happen to your credit score if you do not manage it wisely? 

Having high credit utilization, defaults, missed payments, and collections can negatively impact your credit score. This can result in higher interest rates on future loans or credit cards. Being denied housing, credit or even job applications. Requiring larger security deposits for utilities or rentals. Having difficulty getting approved for home and auto loans. A bad credit score limits your financial options and can cost you more money over time.

Summary

Creditworthiness has lasting impacts on a person’s financial health. Having a strong credit score will help you have access to credit when you need it and access to lower interest rates. It can help you qualify for better housing options and get approved for utility plans without having to make a large deposit. Continuously improving your credit score not only increases your financial options but reduces your costs over time. In totality, your credit score determines how easily you can move through the financial system. Impacting important life choices like buying a home, car, or starting a business. The better you manage your creditworthiness the more control you have over your financial future. 
Still struggling with credit card debt? See how PDS can help you today.