Recent graduates and young adults venturing into their own financial responsibilities. There is a lot to learn and understand–but credit is one of the most important aspects. So what is creditworthiness? Why does it matter so much? When does it come up? We’ll answer these questions and more in this article.

What is Creditworthiness?

Creditworthiness essentially means how worthy you are to receive new credit. It is based on how your history of handling credit. Lenders consider you creditworthy if you have a history of handling credit well–like making on-time payments. It tells a creditor that you can be trusted to pay your debts. Lenders use creditworthiness to determine whether or not to trust you with that new credit card or loan you’ve applied for. Many also use credit to determine interest rates–people with good credit may qualify for lower rates.

How Creditworthiness Is Determined

These are three main factors that go into determining creditworthiness.

#1 – Credit Report

The first thing lenders will look at is your credit report. This report contains information about the amount of debt you’ve taken on, your credit limits, and current balance on each account. It also highlights any red flags such as defaults, collections and bankruptcies. This information tells the lender a lot about your financial situation and whether or not you can handle the additional debt. Lenders will consider you creditworthy if your finances indicate that you can be trusted with the money you’re borrowing.

#2 – Payment History

Your payment history is another major factor that lenders use to determine your creditworthiness. Lenders will consider you favorably if you’ve been punctual with all your loan and credit-card payments. You won’t meet the creditworthiness test if you have history of late or missed payments, default or any other inconsistency.

#3 – Credit Score

Credit score is also used to measure creditworthiness. The higher your score the better. You’ll have no problem getting approved for any type of credit card or loan.

 Importance Of Creditworthiness

Creditworthiness plays a key role in how easily lenders will approve your loan or credit card application. The higher your creditworthiness, the easier it will be to get approved. That’s not all. You’ll also benefit from better terms on your credit card or loan as well as lower interest rates on any money you borrow. The lower interest rate can reduce the cost of borrowing considerably especially when financing large purchases such as a home, vehicle or college education.

Your creditworthiness can also affect your insurance premiums, employment eligibility and business funding. In some cases, it can also affect your ability to rent a home.

It is a good idea to check your credit report regularly to assess your own creditworthiness. This is especially important to do before applying for a loan or any line of credit. You are entitled to get one free credit report every year from all credit bureaus. When you receive your report, go through it carefully to check for errors that affect your credit score adversely. If you identify any errors, you can dispute them and ask the bureau to look into it and make the necessary corrections. If left unresolved, these errors can lower your score and your creditworthiness, costing you a lot in the long run.