Credit score, credit report, creditworthiness – these are just some of the factors lenders use to determine eligibility for a loan. Knowing what information creditors consider could help you determine your chances of getting approved for a loan and what terms you’ll likely be offered before applying.
To make things a little clearer for you, we’re going to break down the two most essential credit terms: creditworthiness and credit score. By the end of this article, you’ll not only understand the difference between the two but also how you can improve both of them!
What is Your Creditworthiness?
Creditworthiness is exactly what it sounds like – whether a creditor thinks you’re “worthy” or not of credit! Essentially, this boils down to how confident a creditor is that you are able, willing, and responsible enough to follow through on any obligations tied to the form of credit you applied for. For loans, these obligations are whether or not you’ll make monthly payments in full and on time, and if you’ll repay the loan within the pre-established time frame.
What Impacts Your Creditworthiness?
To evaluate your creditworthiness, a lender looks for evidence that you:
- have a history of successfully managing and repaying your previous debts, such as personal loans or credit card debt
- and usually pay your bills when they are due.
They don’t have to look far, as all of this information is found on your credit report and within your credit score. We’ll get to your credit score in a bit, but it’s first important to understand what your credit report is and how it works.
Curated and maintained by the three main credit bureaus (TransUnion, Equifax, and Experian), your credit report outlines all your outstanding debts in addition to any accounts you’ve closed or paid off within the last 10 years. Each entry on your credit report notes what your monthly payment(s) are and whether the payment was made on time, or made 30, 60, or 90 days late. Additionally, accounts sent to collections, repossessions, foreclosures, and bankruptcies are also included in your credit report.
As for your credit score…
What is Your Credit Score?
Your credit score is a 3-digit number ranging from 300 to 850 that represents the likelihood you’ll pay your bills on time. A higher score indicates to lenders that you have shown responsible credit behavior in the past and signals to them that you’re likely to be responsible with any credit they give you in the future. Below is a breakdown of various credit score ranges and what they mean:
- Excellent Credit: 850-750
- Good Credit: 749-700
- Fair Credit: 699-600
- Poor Credit: 599-300
What Impacts Your Credit Score?
Your credit score is impacted by factors such as:
- the amount of debt you owe
- your payment history
- your credit history (i.e., how long your accounts have been open)
- how frequently and recently you’ve applied for and/or received new credit
- your credit utilization ratio (i.e., the ratio of how much credit you’re currently using to how much credit you have overall)
- and your credit mix (i.e., the kinds of credit you have)
All of these factors are weighed by credit scoring systems such as VantageScore and FICOScore, which determine the numerical value of your credit score.
What’s the Difference Between Your Creditworthiness & Credit Score?
So, what’s the difference between your creditworthiness and your credit score? In short, your credit score is a numerical representation of your creditworthiness!
However it’s important to note that your creditworthiness in the eyes of one lender may differ from another creditor’s evaluation of you. This is because different lenders and different financial products consider a variety of factors when determining your creditworthiness. Your credit score, however, will always be included in this evaluation.
How Can I Improve My Creditworthiness & Credit Score?
Luckily, because the two are closely related, the habits that will improve your creditworthiness will also improve your credit score! There are several things you can do to improve both your credit score and creditworthiness, including:
- Avoiding high credit utilization. As a rule, you’ll want to keep your credit utilization around or under 30% if you can help it.
- Consolidating debt with a personal loan. If you’re struggling to keep up with multiple debts, then a personal loan may not only help you manage your debt better but also improve your credit score! By taking several monthly payments and consolidating them into one affordable monthly payment, you’re able to get your finances back on track, which will increase your credit score (and creditworthiness) over time.
- Paying bills on time. Even something as small as paying your phone bill or utilities on time every month can go a long way to improving your credit score and creditworthiness.
- Managing a mix of credit. Successfully managing a mix of installment loans (such as car loans, personal loans, or student loans) and revolving credit accounts (such as a credit card) shows lenders that you’re financially responsible and creditworthy.
- Keeping an eye on your credit reports. Mistakes are an inevitable part of life. However, a mistake on your credit report can hold back your financial life! That’s why you should keep an eye on all three credit reports from each of the major bureaus and dispute any information that you believe is incorrect.
One In the Same
While there isn’t a “one-size-fits-all” definition of creditworthiness, your credit score will always play an essential role in defining it. If you’re looking to increase your credit score and creditworthiness, a personal loan from Credit Direct can help! Check your rate in minutes with no effect on your credit score.