Credit worthiness, also seen as creditworthiness, is an assessment of a prospective borrower to determine the likelihood that the borrower will default on debts. A number of things are taken into a account when evaluating borrowers to find out how credit worthy they are. Borrowers can increase their chances of getting loans at favorable terms by familiarizing themselves with the criteria that come into play in credit worthiness evaluations and monitoring their credit reports for signs of adverse entries that might impact their credit ratings.
There are two components to credit worthiness. One is a borrower's current and projected ability to repay a loan or offer of credit. This can be determined by looking at things like income, other debts the borrower is carrying, expenses, and future employment opportunities. Lenders can use this information to find out how much they could safely lend to set a limit on loans and credit.
Another issue is the borrower's inclination to repay debts. This is a bit more complicated because there is no convenient formula for finding out whether or not a borrower will stop paying off a debt on a whim. Some warning signs can be repeated delinquencies on other debts, sluggish repayment of loans, and other entries in a borrower's credit history. Essentially, the lender tries to characterize the borrower in order to see whether or not the borrower will take the loan seriously.
One tool lenders can use to quickly assess credit worthiness is to consult a credit rating agency. These agencies monitor consumers and keep track of their financial activities to generate a credit score. The score is a reflection of someone's credit history, including number of accounts open, total debt, types of accounts, and history of default or delinquency. This rating can be used as a rule of thumb by a lender looking to quickly eliminate poor candidates for loans.
People can improve their credit worthiness by keeping their debts to a manageable percentage of their income and paying bills on time. It's important to be aware that the older a delinquency is, the less weight it is given. Likewise, the shorter a delinquency is, the less serious it is. Credit agencies recognize that people may have a rocky credit record at some point and then work to clean it up. This is rewarded with a higher credit score for people who are clearly trying to keep their records in order after previous mistakes.
