What is creditworthiness?

When you want to borrow money, your creditworthiness comes into play. And lenders can use this information to decide whether to extend a line of credit to you. 

Creditworthiness is a lender’s assessment of how an individual manages their financial obligations, which includes their likelihood of paying debts. It’s based on various factors, like credit scores. 

What you'll learn:

• Creditworthiness refers to a lender’s assessment of how likely a potential borrower is to pay back a line of credit.
• Creditworthiness can be the baseline for lenders deciding to loan an applicant money for things like buying a car or home or opening a credit card.
• The 5 C’s of credit—character, capacity, capital, collateral and conditions—are major factors lenders consider when evaluating applications from borrowers.
• Borrowers can improve their creditworthiness by taking steps to improve credit reports and credit scores.

Lenders can gauge a potential borrower’s creditworthiness by accessing their credit reports, which are used to calculate credit scores and describe a loan applicant’s financial habits. Lenders may consider information from the reports, such as a borrower’s history of paying bills on time, when deciding whether to extend credit or approve a loan. 

Data that influences your credit scores includes: 

• Your payment history
• How much unpaid debt you have
• How many credit accounts you have—and what types they are
• How long your credit accounts have been open
• How much available credit you’re using
• Whether you have new credit applications
• Whether you’ve had a debt sent to collections, a foreclosure or a bankruptcy—and when that happened

Creditors might use a system—sometimes referred to as the 5 C’s of credit—to measure the creditworthiness of an individual. Here are the basics:

1. Character: This refers to a potential borrower’s credit history—or how they’ve handled financial obligations in the past. This can give lenders a better idea of a potential borrower’s credit risk.
2. Capacity: This is a potential borrower’s ability to repay a line of credit. Lenders may consider the amount of debt a potential borrower has against their total income—also known as a debt-to-income (DTI) ratio. Some lenders may have DTI ratio requirements for approving a loan application. The Consumer Financial Protection Bureau (CFPB) recommends keeping your DTI ratio at 36% or less. 
3. Capital: The portion of funds an applicant plans to put toward a loan is called capital. A down payment on an asset, like a car or a home, is an example of capital that a lender may consider when determining a borrower’s creditworthiness. Putting more capital toward a loan can make it easier for a borrower’s application to be accepted. It may also result in more favorable loan terms. 
4. Collateral: Commonly defined as an asset that can be used to back a secured loan or secured credit card, collateral is part of an applicant’s creditworthiness. Lenders may have more confidence in extending a line of credit to a borrower using collateral—like a car or cash—to secure the loan. That’s because a lender or credit card issuer can take your collateral if you can’t make payments.
5. Conditions: This refers to the actual conditions of the loan. For example, the interest rate and the amount borrowed can impact the overall lending decision. Conditions can also refer to the reason behind the loan. Lenders may be more likely to extend a line of credit for certain types of loans.

Creditworthiness matters because it can be a basis for lending decisions. It could also play a part in determining certain terms of a loan, like interest rates or fees. 

Creditworthiness can be important when you apply for:

• Car loans
• Credit cards
• Home equity loans
• Insurance policies
• Mortgages
• Personal loans
• Rental properties

Employers and utility companies may even evaluate your creditworthiness.

You can get a better idea of your creditworthiness by checking your credit reports and credit scores. Equifax®, Experian® and TransUnion® are the three major credit bureaus that compile credit reports. Credit-scoring companies like FICO® and VantageScore® calculate credit scores based on information in your credit reports.

Your options for checking your credit scores and credit reports include:

• Obtaining a free credit report from each of the three major credit bureaus by visiting AnnualCreditReport.com. 
• Considering a credit monitoring service like CreditWise from Capital One, where you can access your credit report and credit scores anytime for free—without negatively impacting your credit scores. You don’t even have to be a Capital One cardholder to sign up.
• Seeing what options are available from credit bureaus or credit counselors.

By understanding what your credit score is, you can get a better idea of your eligibility when requesting a line of credit.

By taking steps to improve your credit scores, you might become more creditworthy to lenders. Here are some tips:

• Maintain a low credit utilization ratio. The amount of available credit you use—or your credit utilization ratio—can have an impact on your overall credit scores. Your credit scores may improve if you take steps to keep this ratio below 30%, according to the CFPB.
• Keep hard credit inquiries to a minimum. A hard inquiry—or a request from a creditor to review your credit report when considering you for a loan or credit card—can affect your credit scores. That’s why it’s a good idea to apply for credit only when necessary.
• Make on-time payments. Making an effort to keep payments timely can help improve your creditworthiness. If you’re late on any payments, getting them up to date could also help your scores over time. 
• Consider applying for a secured credit card. If you’re building or rebuilding your credit, you may consider applying for a secured credit card. This type of credit card requires you to deposit money with the card issuer before you can use it. From there, you can make purchases—typically up to the security deposit amount. If card activity is reported to the credit bureaus, it could help you build or rebuild credit.

Your credit scores give lenders a quick read on your credit history, but they don’t tell them everything about your finances. They’re calculated from information in your credit reports and help predict aspects of your credit behavior, such as payment history. Creditworthiness—how a lender assesses your likelihood and ability to repay a debt—is the bigger picture. That assessment may consider factors such as your income, existing debts, savings and assets.

Certain financial patterns and behaviors can signal to lenders how comfortably someone can manage a new payment—or how creditworthy they are. Consider these two hypothetical applicants as examples:

• One applicant has a history of paying credit accounts on time, maintains a low DTI ratio, has savings and has enough income after existing expenses to take on another payment. Together, these attributes may signal a strong credit profile and give a lender more confidence in the applicant’s ability to manage additional debt. 
• The second applicant has frequent late and missed payments, a consistently high credit utilization ratio and existing debt payments that leave them with little flexible income. Depending on the loan, these attributes may signal greater repayment risk.

Keep in mind that these are only examples. Lenders may weigh applications differently based on the type of loan and their own criteria.

Creditworthiness can impact lending decisions when you apply for a loan. This is why it’s important to understand your creditworthiness as a potential borrower—and take steps toward improving it, if necessary. 

If this is the right time for you to seek new credit, see if you’ll be approved for a Capital One card with 100% certainty—without affecting your credit scores.