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What is credit worthiness?

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    When you break down the word "creditworthiness," you get "credit worthy." But what does this really mean?

    Creditworthiness is bank speak for the ability to pay a loan back on time (and a credit card is a version of a loan). It's a way lenders can assess your ability to pay back your debts towards a loan or credit card.

    Being creditworthy is essential in your financial journey because it can impact the way you may make important life decisions, such as buying a car or an engagement ring. Enrolling in Chase Credit Journey® can help you better understand where your creditworthiness is currently and how you can go about improving it so that you can accomplish these financial goals.

    In this article, you will learn about:

    • Why creditworthiness matters
    • How creditworthiness is measured
    • Factors that affect creditworthiness
    • How to improve your creditworthiness

    Why does creditworthiness matter?

    There are plenty of reasons why creditworthiness is important. It helps protect both you and the financial institution from being put into a bad position. With creditworthiness, many factors are taken into account to evaluate whether or not you can receive a loan and how much to give you.

    When you take out a loan, your creditworthiness helps determine your rates and approvals for loans. It also helps a lender decide how much credit to give you access to. The more creditworthy you are considered to be, the better your chances are of getting a more ideal rate, credit limit and more.

    Creditworthiness matters for a wide variety of reasons:

    • It can impact your annual percentage rate (APR)
    • It could affect the amount of the loan
    • Plays a role in the types of loans you can get approved for
    • Allows you to take out loans to make purchases and life decisions important to you
    • Helps you build up a history over time that can grant you more access to financial opportunities

    Creditworthiness can build trust

    The more you've shown a bank that you can manage money responsibly, the more likely a bank will feel confident lending to you, and you may be eligible for higher amounts. Creditworthiness is a way to represent your reputation for good financial-related behavior, which not only creates trust between consumer and lender, but also signals low risk to the financial institution.

    Note that creditworthiness does not translate to your value as a person. You are not "bad" if you are not deemed "creditworthy." You could have a poor credit score that hinders you from getting a lower APR, but that does not mean you are a failure, or can never achieve a more ideal financial outlook.

    For example, maybe in the past due to unforeseeable circumstances (like sudden medical bills) you were unable to attain a high credit score or maintain a good credit history. However, there are still ways to improve and move forward.

    Creditworthiness is not a perfect measurement

    Admittedly, creditworthiness is flawed. A credit bureau or a financial institution can't know everything about you, and there are often extenuating circumstances that can make it difficult for a person to be approved for a loan. Many people who have been denied a loan could have the ability to pay back the loan. For example, if you don't have a credit score but you have an income, you could be denied because you don't have a credit score.

    Being denied does not translate to invalidating you and your abilities. Rather, it means there's not enough data available. Your job as a consumer looking to take out a line of credit is to make more data available, such as payment history. That's why establishing credit earlier on is beneficial — keep in mind that it can take a few years to establish a good credit score.

    How is creditworthiness measured?

    Lenders use creditworthiness as a way to measure your status as a would-be borrower. So, what are lenders measuring exactly? And how does this demonstrate your reliability?

    Similar to credit scores, your creditworthiness can change based on your financial choices and behavior. Your creditworthiness can often be seen in parallel to your credit score — the better your score, the more likely you will be deemed creditworthy.

    The factors that go into determining your creditworthiness often include, but are not limited to:

    • Credit score — a three-digit number that helps indicate your ability to make your payments on time
    • Debt-to-income ratio — how much money you owe vs. money coming in
    • Credit utilization — the ratio of how much of your credit limits you use
    • Length and age of credit — how long you've had your accounts open
    • Credit mix — the diversity of accounts
    • Derogatory remarks — negative items on your credit report, such as bankruptcy
    • Collateral and assets — such as a car, home, investments, etc.
    • Co-signers — the number of co-signers that are associated with your accounts

    How to improve your creditworthiness

    Establishing your creditworthiness can take time and patience. If you've been researching how you can improve your credit score or increase your chances of getting approved for loans — it essentially comes down to the same few tips you keep hearing. These include but are not limited to:

    • Paying your bills on time
    • Paying more than the minimum monthly payment, if possible
    • Keep your credit utilization ratio around 30%
    • Review your credit reports and monitor your credit score

    You can also choose to enroll in credit and identity monitoring services when you sign up for Credit Journey®. These services can help keep you aware of major changes to your credit and help stay ahead of suspicious activity — such as fraud or identity theft — which can hurt your score.

    You can also keep track of your credit score by checking it anytime. Without impacting your credit, you can check your score, which refreshes every seven days when you check it regularly, and monthly if you check less frequently.

    In conclusion

    Creditworthiness is a tool used by financial institutions to help them approve loans, land better APRs, decide on a credit limit and more. Becoming creditworthy takes time, patience and diligence, and requires healthy financial habits. But you can do it! By using free online tools such as Credit Journey, you can plan out your credit goals and improve your score.

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