Credit Worthiness

Your creditworthiness will be determined by various factors. Given below are the key factors: 

1. Repayment History: Banks or other lending institutions determine the creditworthiness of a borrower to a great extent by their repayment history of loans and credit card bills. If the borrower fails to make a credit card payment, it will impact the credit score. Apart from this, if you repay your credit card dues or loan after the due date and if the number of unpaid bills increases, it will affect your credit score. A credit score is contributed by 30 percent of a borrower’s credit history. Thus, it is extremely important to repay Equated Monthly Instalments (EMIs) and credit card bills on time. 
2. Number of Credit Inquiries: As we have already discussed, lending institutions make sure to check the borrower’s credit report before sanctioning a loan in order to determine if there is a new credit enquiry. This helps in assessing whether the borrower has the ability to repay the loans. If a borrower applies for multiple credit cards or loans on a regular basis, this shows that they may not be able to meet certain repayment conditions. If a borrower makes multiple credit inquiries, their credit score will be reduced by 20 percent. 
3. The Utilisation of Credit: The third most important factor which determines the creditworthiness of a borrower is their credit utilisation. This contributes 25 percent of your credit score. In addition, in case a borrower has poor spending habit, it can result into higher credit utilisation ratio which will automatically decrease the credit score. 
4. Credit History Length: If you have a stable and a long credit history, it will provide a positive impact on your credit score. The lenders will approve loans to those who have a consistent repayment history. Hence, one should not close old credit cards even if they are not using and keep the cards active in order to maintain a good credit score. 
5. Credit Mix: The lenders will also ensure to check the credit mix of secured as well as unsecured loans before approving a loan. 

Importance of Creditworthiness 

Now, let us look at the importance of creditworthiness: 

1. In case you do not have any plans to apply for a new credit card or a loan in future, it is important to maintain and improve your credit score. 
2. Other than financial institutions, a wide range of sectors like cell phone carriers and cable providers will affect your creditworthiness. 
3. If you maintain a good credit score consistently, you can avail any kind of financial as well as non-financial services in future, without any restrictions. 

How do Credit Scores Work? 

Although credit score may not determine the creditworthiness of a borrower, it can play a significant role in their financial life. In fact, creditworthiness plays a primary role in the decision of a lender. For instance, borrowers who have credit score of less than 640 are mainly considered risky. In such cases lenders charge high interest on loans offered. This helps to compensate for having the additional risk. Not only this but they also have to repay the debit in a shorter tenure.  

On the other hand, a credit score of 700 or more is considered strong and lenders provide them loans at a relatively lower interest rate. Credit scores above 800 are considered excellent. Now, let us have a look at the various credit score range: 

1. Poor: 300 to 579 
2. Fair: 580 to 669 
3. Good: 670 to 739 
4. Very Good: 740 to 799 
5. Excellent: 800 to 850 

Whether it is a personal loan request or a credit card application, lending institutions check the credit score of the borrowers without any fail to assess their eligibility. A higher credit score shows a lower risk premium for the banks or NBFCs.  

A good credit score can help you secure lower interest rates on loans and credit cards.

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