Being creditworthy means you are deemed responsible enough to be trusted with credit. It is how creditors and lenders will decide if you can be approved to borrow money from them. This is also how they will decide on the interest rate of the loan or credit account.
But how will they decide if you are creditworthy or not?
Simple. It is through your credit report. You cannot be considered creditworthy is you have never used credit before. You need to prove to them that you have borrowed money in the past and you are capable of meeting all the responsibilities and obligations associated with it. Your credit report will display your behavior when it comes to using credit – how much you borrow, how you pay it back, etc.
Your credit score is calculated based on what is reflected in this report. This is the score that will easily tell creditors and lenders if you are creditworthy. If you have a high credit score, that means you can be trusted to borrow money. If it is low, they should be wary of lending you. So if you want to build up your credit score, you need to make sure you have the right information in your credit report.
In a society that puts so much importance on the use of credit, you know that you need to learn how to manage your debt wisely so you can have a high credit score. With a high score, you can enjoy lower interest rates. Since it is expected that interest rates will be rising this year, you need to make sure your credit score is high enough to help you get the lowest rates.
Tips to improve creditworthiness
While there are several ways for you to improve creditworthiness, it is important for you to realize that this is not something that you can accomplish overnight. It is not a one-time effort that you have to exert. In fact, it requires consistent effort on your part. That means you need to learn certain credit score-friendly habits that will help improve your credit behavior.
Here are some tips that you can use to make this happen.
Do your research
Before you can do anything else, you need to fully understand what you have to accomplish. To improve creditworthiness means you have to know how to do it. Understanding what a credit score is and how it is calculated will help get you started. You can begin by looking into your own credit score. Get a copy of your own credit report. The three major credit bureaus are mandated by the government to provide consumers with a free copy of their credit report each year. That means you can get three copies every year. Just visit AnnualCreditReport.com to get your copy. Just get one so you can use the other two copies on a different date. You can use one of the many credit score calculators online to get your current score. Know where you stand so you can understand how to start building your creditworthiness up.
Deal with bad debts
If you had debts that were already sent to collection, you may want to take care of that. You can request your creditors to erase any negative entry if you can work on a debt repayment plan with them. Or you can pay them to remove it. Negotiate with them so you can clear the negative entry. Of course, sticking to your current repayment plans will also improve your creditworthiness. It will not be as fast as when the entry is just erased – but it will also work.
Be cautious of your payment history
This is for the rest of the debts that you owe that is not yet in collections or late. Being creditworthy basically means you can be trusted to pay back the money you borrowed. If you want to improve creditworthiness, you need to start paying your debts. Do not make big payments – unless you can afford it. But you have to know that it is not the best way to increase your score immediately. Consistency is how your score will rise – and your credit reputation with it.
Maintain a 30% credit utilization rate
Experts reveal that your credit utilization rate should be 30% or lower. This means your balance should not exceed 30% of your credit limit. So if your credit limit is $10,000, you should never borrow more than $3,000. That is the best way for you keep your credit score up. According to statistics, Baby Boomers and the Silent Generation are the only ones complying with this. Millennials, Gen X, and even Gen Z have a credit utilization rate higher than 30%. While it does not reach 40%, this should still be something that should be worked on.
Try to make bigger down payments for loans
This is meant to give your credit utilization a boost – which we have mentioned is one of the factors influencing your creditworthiness. One of the ways you can keep a new loan from negatively affecting your credit score is by making sure that you pay a much down payment as you can. Loans like a mortgage or car loan usually require a down payment. The bigger you can give, the less debt you have to borrow. This will also make the loan less of a risk to the lender or creditor. The lower the risk, the lower the interest rate. That means a bigger down payment will not only help improve creditworthiness, it can also help you save money in the long run.
Why is creditworthiness important?
Creditworthiness is important because of the way our society has put so much importance on our credit scores. According to reports, a credit score impacts your life significantly. It can influence your ability to buy a house or even your employment. While the government tries to control the discrimination that people with bad credit scores go through, it is not something that they can completely erase. There is a stigma associated with having a bad credit score – just like bankruptcy.
Even if you do not plan on using credit, there are others who will still look at your credit score. From cell phone and cable service providers – there are so many companies who will look at your creditworthiness. If you want to lower your expenses, you should always try to get a good deal out of every bill that you have to pay. A good credit score can help you with that. It will prove to all service providers, utility companies, landlords, and of course, creditors and lenders that you have the ability to pay back what you owe. It tells them that you are responsible enough to meet your monthly payments.
If your personal life wants to shy away from credit, your business will surely not feel the same way. So if you ever have dreams of becoming your own boss, you may want to take care of your creditworthiness because it will affect various business opportunities.
Raising and maintaining a credit score is not just about the number. It speaks volumes about your character and how you manage your finances. If you want to have a good credit reputation, you need to apply good financial and credit management habits. That is one of the most effective ways to improve creditworthiness.