The First Step toward Improving Your Credit Score Is Understanding Creditworthiness
What is Creditworthiness?
Creditworthiness is the trust that once a loan is made, it will be repaid on time and according to the terms of the loan agreement. A creditor uses certain guidelines to determine if a person is creditworthy. In the banking industry, there are 6 factors used in determining your creditworthiness:
1. Credit Score -- the 3 digit number based on several factors used in comprising the score;
2. Character ------ determined from the credit history and demonstration to repay the loan;
3. Capacity -------- the wherewithal to repay the loan from revenue from either employment or business;
4. Capital ---------- the net worth of the borrower ... that is the difference between assets and liabilities.;
5. Collateral ----- unobligated assets or property that can be used as security for the loan; such as a home;
6. Conditions ---- economic circumstances that may inhibit the ability to repay; such as a worker's strike.
Of the 6 factors above, the subject of this page is the Credit Score because building creditworthiness begins with understanding these three digits.
What is the Credit Score?
The credit score is a 3 digit number that is used to determine ones ability to repay a loan. Being denied or approved for credit is largely dependent on the credit score. It is also used in determining the value of the interest rate the borrower will pay for the loan. The better the credit score, the better the interest rate. The credit score is also used in being approved for an apartment, a job, and acquiring insurance.
How to Improve a Bad Credit?
The first step in improving your credit score, and making yourself more creditworthy to lenders, is to understand how credit scores are calculated. Obviously, the better your credit history, the higher your credit score, but what factors play into calculating the score? The chart below is a graphical depiction of what components comprise the credit score as well as the weight each has in the overall score.
An explanation of the meaning of the chart follows:
1) 35% of your credit score is derived from your payment history
(so always making your payments on time boosts your score ).
2) 30% relates to account balances
(which have to be at manageable and reasonable amounts).
3) 15% is the length of relationships with creditors
(credit card companies, mortgage companies, auto loan lenders and more) .
4) 10% is related to credit types because the credit scoring agency likes to see
you can manage different types of credit such as credit cards, student loans,
auto loans, mortgages, etc.
5) 10% is about establishing new credit, so it can improve your credit score to
apply for new credit, preferably a type of credit that you may not already possess.
Start the process of understanding your credit score
by pulling a free copy of your credit report below:
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