If you’ve ever applied for a credit card or a loan, you may have wondered what factors go into approval. While many things may come into play when it comes to credit approval, one key factor is your creditworthiness.
Creditworthiness boils down to how reliable you are when paying back the money you owe. Knowledge of creditworthiness is important for anyone using or planning to use a credit card. And to get the full picture of what creditworthiness is, you must first understand how credit works.
What is creditworthiness and why is it important?
Published June 8, 2023
6 min read
Key Points About: What is creditworthiness?
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Creditworthiness measures how reliable you are in repaying your debts.
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Lenders use your creditworthiness to help determine if you’re a good person to loan money to.
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Good credit habits (like keeping your credit usage low and paying your bills on time) can help you build creditworthiness.
How does credit work?
Credit is a system that allows you to borrow money to pay for goods and services, on the condition that you repay the money later. Lenders want to be sure that you are good to pay back any money they loan you, and they assess this with your creditworthiness. Lenders may review your credit report, credit score, income, and current debts to figure out your creditworthiness. Responsible credit card habits are one way you can help build creditworthiness.
Did You Know?
If you’re new to credit or need to rebuild your credit, the Discover it® Secured Credit Card helps you build or rebuild your credit history.1
How do credit cards impact creditworthiness?
When you use a credit card you are essentially purchasing goods and services on credit, or "on a loan." In other words, when you use a credit card, you are borrowing money from the financial institution that issued the card. Credit cards are a revolving form of credit, meaning you can borrow up to your credit limit every month.
You pay back your credit issuer when you make your monthly payments. Your monthly payments will include the initial amount that you spent on purchases, which is called the principal, and may also include interest. Your ability to pay back this amount monthly and in a timely manner helps determine your creditworthiness.
Remember that credit cards are a powerful financial tool and, when used responsibly, can help you manage your finances and establish creditworthiness. However, it is critical to practice good credit habits.
How does creditworthiness tie in with my credit score?
Creditworthiness measures your ability and reliability to repay debts. Your credit score (usually a number between 300 and 850 based on FICO), is one factor lenders use to determine your creditworthiness. According to the Federal Trade Commission, a higher credit score indicates greater creditworthiness and can make you more attractive in the eyes of banks and financial institutions when applying for loans or new lines of credit. While a lower credit score may make it more difficult to get credit on favorable terms.
Why is creditworthiness important?
Creditworthiness is important for a few reasons:
Approval for loans and lines of credit: A higher credit score makes you more attractive to banks and financial institutions when you apply for loans or lines of credit. This can include approval for a new credit card, auto loan, or home loan.
Lower interest rates: A high credit rating can save you money in the form of lower interest rates on loans and lines of credit. A lower interest rate means you will pay less interest over time, making your debt less expensive.
Job opportunities: According to the Consumer Financial Protection Bureau, some employers use background checks as part of the hiring process (which may also include running your credit report).
Rentals and leases: Landlords may check your credit score when they review your application for a rental apartment. According to Consumer.gov, a high credit score can make it easier for you to get the apartment you want.
Utilities and cell phone contracts: According to the Federal Trade Commission, a good credit score may also help you get services such as electricity, gas, and cell phone contracts without you having to pay a security deposit.
How do you build creditworthiness?
Good creditworthiness takes time and discipline. Here are some tips on how you can help build creditworthiness and help your credit score:
Pay bills on time: You should pay your bills on time, including credit card balances, as your payment history makes up 35% of your credit score according to FICO.
Maintain low credit utilization: Credit utilization is the ratio of your credit card balance to your credit limit. According to the Office of Financial Readiness, you should ideally aim for a credit utilization ratio of 1-10%.
Have a good credit mix: A good credit mix, including both installment credit (such as mortgages and auto loans) and revolving credit (such as credit cards), may help your credit score.
Keep old credit accounts open: The length of your credit history is another important factor in determining your credit score. According to Consumer.gov, keeping old credit accounts open can help extend your credit history and may help your score.
Limit applications for new credit: Every time you make an application for new credit, lenders may check your credit report, which can temporarily affect your score. Try to limit the number of hard credit inquiries you make over time.
Why should I monitor my credit report and credit score?
Your credit report is an important part of how lenders determine your creditworthiness. So, it’s important to stay on top of your credit score and reports regularly to make sure the information is accurate and up to date. According to the Federal Trade Commission, you can request a free copy of your credit report once a year from each of the three major credit reporting agencies. Check your report carefully for any errors and, if you find any, contact the reporting agency or original creditor to troubleshoot it.
In addition, checking your credit score can help you understand how your financial actions affect your score, and help you make informed decisions to improve your creditworthiness. Discover cardmembers can get their FICO® Score for free with no harm to their credit.2
Improve creditworthiness with wise credit card management
Responsible credit card use is crucial to maintaining good creditworthiness and preventing excess credit card debt. Here are some tips for managing your credit cards responsibly:
Establish a budget: Create a monthly budget to help you keep track of your spending and avoid spending more than you can afford.
Limit excess spending: Avoid using credit cards for impulsive or unnecessary purchases. Instead, use credit cards for planned expenses that are included in your budget or for one-off emergencies.
Pay the balance in full each month: If possible, pay your credit card balance in full each month to avoid paying interest.
Monitor credit card spending: Check your credit card statement regularly to make sure you are not exceeding your credit limit and to identify any unauthorized charges.
Ultimately, creditworthiness is a crucial aspect of your financial life. Creditworthiness allows you to access loans and lines of credit on better terms and can positively affect aspects of your life such as employment and renting an apartment. By following the tips shared in this article, you can build and maintain a good creditworthiness and enjoy the benefits that come with it.
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