Definition
An applicant’s creditworthiness is a calculated predictor of their likelihood to properly manage a credit account and repay any debt incurred.
Analysis
Creditworthiness depends on a number of factors that vary from one creditor to another. However, creditworthiness is generally measured based on two primary factors:
- The applicant’s capacity to repay debt (income, debt-to-income ratio)
- The applicant’s demonstrated history of handling credit accounts responsibly (indicated by credit score)
Sometimes an applicant with a poor or limited credit history may find that they need a cosigner in order to gain approval or to receive a lower interest rate. This is an indication that they lack general creditworthiness for the type of credit account they are applying for.
Creditworthiness needs are generally higher for major purchases such as car loans or home mortgages. In addition, creditworthiness can earn different interest rates from creditors utilizing risk-based pricing.
