If you are creditworthy, it generally means that creditors and lenders will be willing to lend you money or extend credit to you. If you are trying to rebuild credit, or maintain good credit, it’s important to know how creditors evaluate your creditworthiness.
(To learn about maintaining good credit or rebuilding bad credit, see our Credit Repair articles and FAQs.)
A potential creditor may want to know whether you are likely to repay an installment sale contract or loan or make timely payments on a credit card. It will evaluate your credit worthiness to decide whether to offer you credit or not, and to decide what interest rates and fees to charge.
A current creditor may want to know if your financial situation has changed to determine if it should reduce your credit limit or raise your interest rate.
Most, of the information creditors want so they can make these decisions comes from your credit report and your credit scores. In order to understand how the information used in your credit score and report affect your credit, it’s important to know how creditors evaluate your credit worthiness. Although most of what creditors consider is in your report, some things are not. (Learn the basics of credit reports and credit scores.)
Here are some of the factors many creditors consider:
Creditors look at how long you’ve been at your job, your income level, and the likelihood that your income will increase over time. They also look at whether you’re in a stable job or at least a stable job industry. (Employment information may or may not be included in your credit report.)
It’s important when you fill out a credit application to make your job sound stable, high level, and even “professional.” Are you a secretary, or are you an executive secretary or the office manager? Present yourself in the best possible light, but don’t lie.
In addition, creditors, especially mortgage lenders, often compare the amount you want to borrow to your income to see if your “debt ratio” is too high. A debt ratio can be a comparison of the particular credit to your income, or a comparison of all your debts to your income. Your credit report generally includes information about your debts, but not about your income.
Creditors also examine your existing credit relationships, such as credit cards, bank loans, and mortgages. They want to know your credit limits (you may be denied additional credit if you already have a lot of open credit lines), your current credit balances and how they compare to your credit limits (are you maxed out?), how long you’ve had each account, and your payment history—whether you have paid late on any accounts and how many times you paid late. This kind of credit information is the main part of your credit report.
Creditors like to see that you have assets they can take if you don’t pay your debt. Owning a home or liquid assets (such as a mutual fund) may offer considerable comfort to a creditor reviewing an application. This is especially true if your credit report has negative notations in it, such as late payments. Although your credit report will probably not tell a creditor what assets you own, the creditor can figure out if you own a home or car and how much you owe on them if your loan and payments are reported.
Creditors develop a feeling of your financial character through objective factors that show stability. These include how long you’ve lived at your current residence, how long you’ve held your current job, whether you rent or own your home (you’re more likely to stay put if you own), and whether you have checking and savings accounts.
This is an excerpt from Credit Repair, by Margaret Reiter and Robin Leonard (Nolo).