An individual or business’s creditworthiness is the assessment of how likely they are to repay debts. Creditors such as banks, lenders, and other financial institutions evaluate creditworthiness to determine whether to extend credit and under what terms. Creditors determine creditworthiness by a wide range of factors that signal the borrower’s financial health and reliability in managing and repaying funds. Different parties might weigh different factors more heavily than others, depending on the reason why the person or entity is seeking credit.

This guide will discuss the factors that affect creditworthiness, why this assessment matters, and how to build your credit.

What’s in this article?

• Why creditworthiness matters
  
• What creditworthiness is based on
  
• What to know about credit reports
  
• How personal credit scores can impact a business’s creditworthiness
  
• How to build your credit
  

Why creditworthiness matters

A good credit score often reflects sound financial health. It indicates disciplined spending, debt management, and prompt bill payments. Conversely, a low score might prompt you to reassess your financial habits, leading to improved financial discipline. Credit scores vary depending on the country, but in the United States, 700 or higher is generally considered a good score, while anything under 630 is considered low. Having a strong credit score can lead to better terms and lower costs on debts, more housing and employment opportunities, and benefits for long-term financial planning.

Here’s how your creditworthiness can impact your life.

• Loan qualifications: Lenders assess your credit history to decide if you qualify for a loan. Creditworthiness determines whether you can borrow money and under what terms.

• Credit card approvals: Credit scores also determine your eligibility for credit cards and associated benefits such as higher credit limits and rewards such as cash back or travel points.

• Interest rates: A higher credit score translates to lower interest rates on loans (e.g., car loans, mortgages) and credit cards. This can lead to substantial savings over the lifetime of a loan.

• Rental opportunities: Many property owners check credit scores during the tenant screening process. A higher credit score can make it easier to rent a home and might even eliminate the need for a larger security deposit.

• Buying a home: Credit scores impact your ability to buy a home. Whether or not you’re approved for a mortgage and the terms and rates you receive depend on your creditworthiness.

• Job opportunities: Some employers check credit reports as part of the hiring process, particularly for positions that require financial responsibility. A poor credit score can sometimes hinder your chances of securing a job, especially in the finance, government, or military sectors.

• Utility services: Utility companies might check your credit score when you set up services such as electricity, water, or internet. A good score can help you avoid paying a deposit.

• Cell phone contracts: Similar to utilities, cell phone providers might require a credit check. Better credit scores can lead to better contract terms or no required deposits.

• Insurance premiums: Your credit score can influence your auto and homeowners insurance premiums. A higher score can lead to lower premiums.

• Financial planning: Your credit score can impact your long-term financial strategies, including your ability to invest, save, or plan for retirement. Good credit provides more flexibility and lower costs in financial products, affecting how you allocate your resources.

What creditworthiness is based on

Your creditworthiness is determined by the following factors:

• Payment history: This indicates whether you have paid past credit accounts on time, and it’s the most important factor affecting your credit score. Missed or late payments, bankruptcies, foreclosures, and other negative entries can greatly lower your credit score.

• Credit utilization: This is the ratio of your current revolving credit (i.e., credit card balances) to the total available revolving credit or credit limit. Lower utilization rates are seen as indicators of good credit management. It’s generally recommended to keep your utilization below 30%, with some experts recommending a utilization rate under 10%.

• Length of credit history: This is the age of your credit accounts. It includes the age of your oldest account, the age of your newest account, and the average age of all your accounts. Longer credit histories are generally seen as more favorable.

• Types of credit: Credit scores reflect whether you have a mix of different types of credit such as credit cards, store accounts, installment loans, and mortgages. A diverse portfolio of credit accounts can positively affect your score.

• Recent credit inquiries: Every time you apply for new credit, a hard inquiry is made, which can slightly lower your credit score for a short period. Several inquiries in a short amount of time can be seen as a sign that you are in financial distress.

• Total amounts owed: This is the total amount of debt you have across all accounts. High overall debt can affect your score negatively, especially if much of it is in the form of high-interest, revolving debt.

• Public records: Bankruptcies, tax liens, and civil judgments can also affect your credit score. These are considered serious negative records and can remain on your credit report for years.

What to know about credit reports

A credit report is a record of an individual’s credit history that’s drawn from multiple sources, including banks, credit card companies, and collection agencies. It distills how the person has managed and repaid all their debts in one place. Here’s an overview of what to know about credit reports.

Accessing your credit report

In the US, you can obtain a free credit report from each of the three major credit reporting agencies—Equifax, Experian, and TransUnion—once every 12 months from an official website authorized by federal law. Here’s how to request a credit report through this website:

• Provide your information: This includes name, address, Social Security number, and date of birth to verify your identity.

• Select reports: You can choose to get your report from one, two, or all three of the credit reporting agencies at the same time. You can request them all at once, or stagger your requests throughout the year to keep an eye on your credit more frequently.

• Answer security questions: You’ll be asked a few questions that only you are likely to know the answers to (e.g., previous addresses, payments of specific accounts) to further verify your identity.

• Download or print your report: Once your identity is confirmed, you can view your credit report online. It’s a good idea to save a copy or print it out for your records.

Understanding your credit report

Your credit report will contain the following information:

• Personal information: Your name, address, Social Security number, date of birth, and employment information.

• Credit accounts: Your account history, including the type of account (e.g., credit card, mortgage, auto loan), the date you opened the account, your credit limit or loan amount, your account balance, and your payment history.

• Credit inquiries: This includes who has accessed your credit report. Inquiries are classified as “hard” (initiated by an application for credit) or “soft” (initiated by you checking your own credit or by preapproved credit offers). Only hard inquiries affect your credit score.

• Public record and collections: Information on bankruptcies, foreclosures, liens, judgments, and overdue debts collected by third parties.

Reviewing your credit report

It’s important to review your credit report to make sure everything is accurate, and to catch suspicious activities that suggest identity theft.

• Check for accuracy: Ensure all personal information and account details are correct. Incorrect information can be a sign of reporting errors or potential fraud.

• Understand account statuses: Look for any accounts marked as late, charged off (meaning the creditor has written the account off as a loss), or in collections. These have a negative impact on your credit score.

• Review credit inquiries: If there are applications you don’t recognize, it might indicate identity theft.

• Note any public records: These can remain on your credit report for 7 to 10 years, depending on the type of record.

If you find errors on your credit report, you should dispute them directly with the credit bureau. Each bureau has its own procedure for disputing inaccuracies, which is typically outlined on its website.

How personal credit scores can impact a business’s creditworthiness

A business owner’s personal credit score can affect their business’s creditworthiness, especially in the early stages of the business or if the business itself has not yet built a substantial credit history. Here are some ways in which a personal credit score can impact a business’s financial standing.

• Initial financing: When starting a new business, owners often need to secure financing such as loans or credit lines. Lenders typically look at the personal credit score of the owner as a key factor in assessing risk, especially if the business does not have its own credit history.

• Credit terms with suppliers: Early business relationships with suppliers often require the business owner to personally guarantee payments. Suppliers might check the owner’s personal credit score to decide on payment terms or whether to extend credit at all.

• Business credit cards: For new businesses, access to business credit cards and the terms of that card can depend heavily on the business owner’s personal credit score.

• Business loans: Similar to personal loans, the interest rates offered on business loans can be influenced by the owner’s personal credit score. A lower score can lead to higher interest rates, increasing the cost of borrowing.

• Expansion opportunities: As the business grows, continuing to rely on personal credit for business expansion can limit opportunities. A poor personal credit score might restrict access to additional funding needed for expansion.

To mitigate the influence of personal credit on business financials, it’s important for business owners to establish and build a separate business credit profile. This involves obtaining a business credit number (such as an EIN in the US), opening business accounts, and ensuring that business transactions are conducted under the business entity’s name.

Establishing a business credit profile separate from personal credit demonstrates the professionalism of the entity, and it can provide more negotiating power with lenders and suppliers based purely on business performance. A business credit profile also limits the personal liability of the business owner by eliminating the need for personal guarantees for business debts.

How to build your credit

Improving your credit can create financial opportunities and help you save money over time. Here are some basic tips to help you build your credit.

• Pay bills on time: Your payment history is the most important factor influencing your credit score. Set up automatic payments or reminders to ensure you never miss a due date.

• Reduce credit card debt: High credit utilization (the amount you owe versus your credit limit) can hurt your score. Try to keep your utilization below 30%.

• Avoid opening too many new accounts: Each credit application results in a hard inquiry on your report, which can temporarily lower your score. Only apply for credit when necessary.

• Become an authorized user: If someone with good credit adds you as an authorized user on their card, their positive payment history can boost your credit.

• Dispute errors on your report: Review your credit report regularly and dispute any inaccuracies you find. Errors can unnecessarily hurt your score.

• Mix credit types: Having a mix of credit accounts (e.g., credit cards, loans) can positively impact your score, showing you can responsibly manage different types of credit.

• Keep old accounts open: The length of your credit history matters. Keeping older accounts open, even if unused, can improve your credit.

• Consider a secured credit card: If you have minimal credit history or bad credit, a secured card can help you responsibly build credit.

• Be patient: Building your credit takes time. Don’t get discouraged if you don’t see immediate results. Keep practicing good financial habits, and your credit will gradually improve.