How to Determine Credit-Worthiness

by Peter Matthews ; Updated July 27, 2017
Nowadays, credit is part of all of our lives

Items you will need

  • Details of income
  • History of loans
  • Credit cards and other credit taken
  • Records of payments of all credit
  • Access to credit rating agencies websites

Credit worthiness is defined as being an assessment of the likelihood that a borrower will default on their obligations. The company lending you money wants to know how likely they are to receive it back from you before they lend you money. Even if a company decides to advance you credit, the rate of interest will be determined by your credit worthiness. You need to know the factors companies look at when determining your credit rating and score, or which factors to consider when advancing credit to somebody else.

Calculating Credit Worthiness

Step 1

Obtain credit reports from the three main agencies: Equifax, Experien and Transunion. As noted below, your report is provided free of charge once every 12 months. If you are looking at providing credit to others, their permission must be sought to obtain their reports, and the agencies will charge for providing it.

Step 2

Check the credit score. Generally, anything below about 720 (the exact figure varies) is below average and might limit the credit that would be made available.

Step 3

Look at the credit profile and performance in the main areas that determine the credit score. These are: payment history, which is how often you have made late payments or missed payments altogether; and credit utilization, defined as how much of the total credit lines available are being utilized. These two factors make up about two thirds of the weighting on the credit score.

Step 4

Look at the other factors the credit rating agencies check –– length of credit history, how often one applies for credit, types of credit utilized and whether there are any court judgments, tax liens or something similar.

Tips

  • Everyone in the United States is entitled to see a copy of their credit report from all the three main credit rating agencies: Transunion, Equifax and Experien for free once every 12 months. Take advantage of this, if you are likely to be seeking credit, as it will enable you to keep track of your credit score without having to pay the fees to any of the many agencies that advertise credit tracking services. It also warns you of any identity theft issues.

    Read through the advice given on the credit rating agencies websites. These will help you decide how you can most effectively increase your credit worthiness or determine another person’s.

    Improving your credit profile takes time, so plan carefully and be patient.

Warnings

  • Although your credit score and credit report is one of the main factors that a lender will use to determine your credit worthiness, it is not the only one, so do not assume that maintaining a reasonable credit score guarantees you credit when you apply for it. If providing credit, do not focus on the credit score to the exclusion of all else; it does not guarantee a borrower’s credit worthiness.

    Be aware that unsuccessfully applying for credit, or applying too often, will in itself lower your credit score so consider carefully before applying for any form of credit facility.

About the Author

Peter Matthews has been a freelance writer since 2004 with works published online for UpDown, Bloomberg and other websites. He has more than 30 years experience in financial markets, during which he has penned everything from conference materials to daily comment pages for organizations such as ABN Amro and Tradition. He is FSA-registered in London and holds series 7 and 24 licenses from the SFA.

Photo Credits

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