What does it mean to be “creditworthy”?
“Creditworthiness” is the term we use for the likelihood that a lender will let you borrow money. Put simply, if a lender thinks lending to you would be too risky, they will reject your application.
Now, conventional wisdom says the better your credit score, the more creditworthy you are. You might be surprised to learn that this isn’t the case. In this article we’ll be explaining how lenders really decide if you’re creditworthy.
What's Included?
How do lenders know if I’m creditworthy?
First things first, let’s be clear: lenders DO NOT use your credit score to determine your creditworthiness. Lenders have their own method of calculating risk, separate from the credit reports offered by credit reference agencies (CRAs).
There are all sorts of statistical analysis that goes into determining creditworthiness. All told, it usually comes down to the analysis of your financial behaviour, as well as your financial situation. However, how you behave before you apply for any form of credit is taken as a measure of how you will behave after you get approved.
What is risk?
The most important calculation for a lender is risk assessment. Every time a lender lets someone borrow money, they take on risk.
Risk, here, refers to the likelihood of a borrower defaulting on a loan. In other words, it means how likely a borrower is to miss repayments on a loan, of both the loan’s principal (the value of the loan) and the interest (a percentage added after the principal).
What’s important to note here is that you don’t have to have “bad” finances for lenders to consider you a risky borrower. While bad credit certainly won’t help your case, simply having too many unknowns in your credit history can also make lenders fidgety.
This is why it’s not only important to avoid bad credit, but to build good credit as well.
What do lenders check for when I apply for a loan?
Your credit score is only a piece of the puzzle. Here’s what lenders are really looking for when you apply.
Credit Cards
You’ve got to have credit to build credit. Lenders feel encouraged to lend to you if other lenders have approved you for credit. If you have a credit card, actively using it can help show that you’re a good creditor. Sticking well within your limit looks even better.
Short-Term Credit
Not all short-term credit is created equal. Having an overdraft, but not using it, can be good for your credit rating. So can paying off your credit card debt each month. Taking out a payday loan, on the other hand, tells lenders that you’re strapped for cash. It’s about toeing the line between showing you can borrow, and indicating to lenders that you have to borrow.
Payment History
Lenders feel even more encouraged to lend to you if you can show that you make payments on time. Having credit is one thing, having good credit is another. Always ensure you make payments on time and never apply for credit if you’re not sure you’ll be able to make repayments each month.
Credit Activity
How often you apply for credit has an impact on your credit rating. Lenders like borrowers with multiple credit accounts (cards, loans, leases, mortgages), over a period of years. They don’t like borrowers who have too many hard searches on their report. This indicates a constant need to keep applying for more credit to supplement their income. They also don’t like borrowers without much credit history, since there simply isn’t enough data to draw from.
Bad Credit
Perhaps the worst thing that can happen to your credit rating is a bankruptcy. This is a last resort option for people who cannot pay off their outstanding debts, even after an Individual Voluntary Arrangement (IVA). IVAs also negatively affect credit rating, as do County Court Judgements (CCJs) and defaults. Keep on top of your debt to avoid bad credit.
Stability
Lenders want to see borrowers who are stable. Having a fixed address you’ve lived at for several years can improve your credit rating. They can check this using the electoral roll, so consider registering to vote. So can steady employment, which means steady income. Employers also want to see that you’ve been in your job for a long period of time. This decreases the likelihood of your being let go without something to cushion the blow.
What is your Credibble Score?
Your Credibble Score takes the factors lenders use to analyse your creditworthiness. It’s backed by our 24-Factor Credit Check, so you can see where you stand for all the important factors and how to improve your chances of borrowing.
How can I boost my chances of getting approved for credit?
If you want to boost your creditworthiness, you need to know what you’re doing wrong and what you’re doing right. That’s where Credibble comes in.
At Credibble, we don’t just give you a credit score, we give you a Credibble Score.
This score is calculated using 24 Credit Factors, split into 6 factors containing 4 sub-factors each. If that sounds confusing, don’t worry. Every Sub-Factor is colour-coded so you can tell at a glance what you need to change.
To build credit, Credibble comes as an initial FREE trial. Prospective homebuyers can also download Credibble Home for mortgage preparation.
There’s no denying it: Building credit is tough, and bouncing back from bad credit is tougher, but there are always things you can do to improve your creditworthiness.
Join Credibble today and get creditworthy!
