While many people try to avoid loans in their lives, most of us get a loan for one reason or another. In most cases, how you use the loan can build or destroy you. If you take a large loan and cannot repay it on time, you could end up ruining your creditworthiness. If you don’t understand how creditworthiness works, this article is for you.
What Is Creditworthiness?
Creditworthiness is the willingness of a lender to trust a borrower that they will repay the loan given to them and do it on time. A borrower’s creditworthiness is determined in various ways, as discussed below.
How Does The Bank Determine Creditworthiness?
The bank does not give out money to individuals. It has to ensure that the individual or business given that amount can repay the loan. In most cases, the bank uses the following factors to consider creditworthiness.
Your credit score
Generally, the higher the credit score of a person, the more likely the bank will trust them with their money. People with low creditworthiness are unlikely to acquire a loan regardless of how convincing their application is. In most cases, if your score is more than 700, you are on the safe side.
Your payment history
The next thing that the bank considers is your payment history. The lender goes through the borrower’s payment history carefully, looking for indications of whether they are financially responsible or not. If you have a history of financial irresponsibilities such as late payments or missed ones, the bank may decide you are not creditworthy. However, if they go through your history and find a great record showing sincerity and commitment, your creditworthiness will increase, and you will likely be given the loan. Always be meticulous in your payment efforts to increase your creditworthiness.
The amount of money you owe
The bank will look at your records to identify the amount of money you might owe from other banks before they decide to give you a loan. They will also look at the amounts you owe from mortgage, credit card, and auto loans. If you owe too much, the bank may decide not to give you the loan.
The length of credit history
Typically, the length of your credit history counts for around 15% of your credit score. Therefore, the bank will want to know the duration you’ve been using credit and the age of the oldest active credit account.
If you are new to borrowing and have no history that the bank can use, your new credit account will count for 10% of your credit score. In most cases, you are likely to get a loan as a new client, but the bank will not risk giving you a lot of money. You will need to maintain a good score so you can get a higher loan in the future.
What Makes A Person Creditworthy?
In a world where trust is in such a minimal supply, trusting people with money is very difficult, even for a bank. However, a person with the following characteristics could be considered creditworthy and gain the trust of the bank.
· A creditworthy person pays their loans on time.
· A creditworthy person has a high credit score because they don’t miss a payment.
· Creditworthy persons have actionable plans on how to repay the loans they will take.
· Creditworthy persons are responsible enough to make payments of the agreed amounts on the agreed time.
· A creditworthy person has a clean repayment history.
· A creditworthy individual has assets that can be used as collateral in case things go wrong and they are unable to repay the amounts they borrowed on time.
Importance of Good Creditworthiness
While some people don’t think they might ever require loans, having good creditworthiness is always an added advantage. To make you understand why you should purpose to maintain good creditworthiness, here are five reasons to convince you.
Your creditworthiness could affect where you live.
Typically, when you decide to buy a house, you will likely need to get a mortgage loan. If your creditworthiness is not good, the bank will unlikely give you the loan as it will consider you a risky client. Additionally, if you have bad creditworthiness and your loan is approved, it will be approved at a higher rate, which means you will have to pay more just because you couldn’t maintain a good credit score. What’s more, some landlords could consider your creditworthiness to decide if they will allow you to rent in their home or not.
You require good creditworthiness to get an auto loan.
Having a car is very convenient, but unfortunately, many people do not have enough money to fund a car and still cover their living expenses. For that reason, many people get an auto loan to get funds to buy a car. Unfortunately, if you don’t have good creditworthiness, you are unlikely going to get an auto loan, meaning you will not be able to finance your car. Even if you manage to get an auto loan, you will need to repay it at a higher interest than you would have if you had a good credit score.
Your creditworthiness could determine where you get jobs.
Some employers could conduct credit checks as part of their hiring process. They usually check credit reports, not just your score. For that reason, it is vital to maintain a good financial responsibility to increase your chances of getting a job. Bad financial responsibility could make an employer hesitant about hiring you. Some employers also check your credit reports to determine whether to give a promotion.
Good creditworthiness is required for business loans
Creating a business, whether small or big, is not always easy, and sometimes you might require a business loan to service it. Even obtaining the smallest business loan requires you to have good creditworthiness.
Living expenses could be affected by your creditworthiness
Sometimes, your creditworthiness may be crucial in your utility services. The electricity company will likely check your credit history before deciding to allow you to borrow one month of electric service.
How to Get A Good Credit Score
Getting and maintaining an excellent credit score is not some Coca-Cola recipe top secret that is known by two people. In fact, getting and maintaining a good credit score is common knowledge, and you only need to do the following:
Always pay your loans on time
The best and sure way of improving your credit score is by always ensuring that you pay your loans on time. If possible, set reminders, so you don’t miss a payment. You can even schedule automatic repayments.
Avoid getting close to your credit limit.
Many banks often look at how close you are to being maxed out. For that reason, always try to keep your balances low compared to your credit limit. That way, your credit score is likely to improve.
Avoid applying for unnecessary credits.
All creditors look at your recent credit activity. If they notice that you apply for a lot of credit over a short period of time, the bank may conclude that your economic circumstances may have changed negatively, and you might not be able to repay the amount on time.
A long credit history improves your score.
There is no way around this; you just need to be patient, repay loans on time, and watch your credit score improve.
Eliminate any errors in your credit reports
Always check your credit reports and ensure that they don’t have any errors. If they have any, make sure to resolve them as soon as possible. If you have any credit cards you might not be using, keep an eye on them to ensure that no individual steals your identity and starts using them.
At some point in over lives, we require to take some type of loan. However, getting a loan is not always guaranteed. The banks consider one’s creditworthiness and decide whether they will give them the loan or not. Having good creditworthiness is important as it increases your chances of getting higher loans at a lower rate, makes it easy to get auto loans, and increases your chances of getting a good mortgage loan. If you want to better your credit score, learn to repay your loans on time, avoid unnecessary credits, avoid getting close to your credit limit and counter-check your credit reports to eliminate any errors.