Finding out what makes you creditworthy isn’t an idle mental exercise. It has real-world application in your life.
Your creditworthiness plays a big role in whether you are approved for your next line of credit. Once you know what makes someone creditworthy, you can cultivate this envious title for yourself.
Many different factors can affect your application for a line of credit online. Before we look at the most common ones, let’s define the meaning of creditworthiness.
Creditworthiness, a Definition
Creditworthiness is another way to say you are responsible with a loan. Officially, it’s the financial world’s judgement whether you can pay your loaned funds within the arranged time.
Creditworthiness exists on a sliding scale based on your financial profile. The more evidence that supports you pay your loans on time, the more creditworthy you look. The opposite is also true. The more evidence casts doubt on your ability to repay your debt, the less creditworthy you become.
How Does the Financial World Determine Your Creditworthiness?
Lenders will determine you are creditworthy if they think you will repay your debts on schedule. So, the question of the hour is, how do the banks, credit unions, and online direct lenders of the world come to this decision?
They look at your financial profile, paying close attention to these key performance indicators:
1. Credit Score
Your three-digit credit score might play a big role in your next line of credit. This number is a reflection of your past borrowing history, which shows whether you pay bills on time or carry over balances on existing accounts.
Your borrowing history might influence a future lender’s decision to grant you funds in several ways. They might deny you outright if your score is low enough. A higher score will generally help you get approved; however, your exact score may influence how much money you get and the rates you pay.
2. Collateral
Some personal loans are secured by collateral, or a valuable asset. If you apply for a secured loan, you back your guarantee you’ll pay on time with your asset. If something prevents you from making good on your promise, a lender has the right to take your asset as payment instead.
At first blush, betting on your assets might seem risky. However, plenty of people borrow this way to lower rates, as collateral may act as insurance in the eyes of a lender.
3. Income
Your employment status and income may also play a role in your creditworthiness. After all, lenders want to know you earn enough to pay your bills.
4. Existing Debt
Your income only shows one side of your cash flow. Comparing your income to your expenses paints a clearer picture of your financial situation. That’s why a lender might check your debt-to-income (DTI) ratio. This ratio shows how much of your paycheck you spend on debt each month.
Generally speaking, if your ratio exceeds 43%, you may find it harder to get approved for conventional personal loans. A DTI this high suggests you may not have a lot of cash left over after you pay your debts in a month. You may not have enough of it to cover another loan.
5. Alternative Credit Information
Some major credit scoring agencies are starting to process alternative data when producing scores. This information may include things not usually involved in your typical borrowing history, like utility bills or cash advances. One day, it may even include your online behavior.
Now that you know what factors affect your creditworthiness, you know what you can work on to look more attractive to your next lender.
