How Do Lenders Determine Your Credit Worthiness?'/

(Image: © Jeremy Blanchard)

Determining credit worthiness

The credit worthiness definition is the assessment of how likely a borrower will default their debt duties. There are several factors that institutions looks into when a consumer applies for credit: your repayment history, your credit score, and your debt-to-income ratio. So how can you tell if your financial stats are desirable?

Your Repayment History

To gauge your credit worthiness, banks will examine your credit report, which includes information on all your credit accounts, payment history, credit inquiries, and whether or not you’ve ever declared bankruptcy or had a lien placed against you. On the report, any late or missed payments will be noted and remain on it for up to seven years—negatively impacting whether or not you get a loan or a credit-card. That’s why it’s so important to pay your bills on time. (If you have a tendency to forget, set up a reminder on your online calendar or smartphone.) It’s also a good idea to check your credit report annually to verify that all the information is correct. (Go to to request a free copy.) If there’s an error, contact the three main credit bureaus (TransUnion, Experian, and Equifax) to have it rectified before it’s wrongly held against you.

Your Credit Score

This three-digit number is the one of the most basic ways for lenders to determine if you’re financially responsible. A personal credit score is calculated by culling numerous pieces of information from your credit report card—including your payment history, the amount you owe (taking into consideration your credit utilization, which is how much credit you’re using compared to your limit), the length of time you’ve had various credit accounts open, the opening of any new credit accounts or credit inquiries made, and the types of credit used (such as credit cards, mortgages, installment loans).

If you have a high score—between 740 and 850—you’ll qualify for the best rates from lenders. (Not sure what your score is? Go to Credit Sesame and get it for free.) But don’t beat yourself up if it’s lower than you’d like. Provided that you make payments on time, pay off outstanding debt, keep your credit-card balances low, and don’t open up new lines of credit, with time, your score will rise.

Your Debt-to-Income Ratio

This figure is just about as important as your credit score when a lender examines your credit worthiness. To calculate it for yourself, simply take your total monthly debt obligations (including payments made toward your mortgage, car loan, or credit-card, for example) and divide that amount by your monthly income. The lower the number, the better. Ideally, it should never exceed 36. In other words, the amount you pay toward your debt should not exceed 36% of your income. If it does, you’ve probably over-extended yourself—and banks are going to view you at a greater risk to default on a loan or line of credit. So work to pay down your debts as quickly as possible—and try not to lose much sleep in the meantime.

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Published August 1, 2012 Updated: April 13, 2016
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3 responses to “How Do Lenders Determine Your Credit Worthiness?”

  1. Diane J. P says:

    Is evaluating credit worthiness just based on those factors or do they look for more than just that? I heard that some companies actually look at your social media profiles? Almost like a social media score lol!

  2. Janet B. says:

    I wanted to learn more on how to check credit worthiness of a company? Are the criteria different from what is used to check for an individual?

    I’m assuming the underlying factors are generally the same, just used more on a macro level, just curious about that.

  3. Robert T. says:

    When it comes to assessing credit worthiness of a borrower in general, you are basically looking at the same factors, like you said, but on a different scale. Of course when you get down to the details it will change in terms criteria and exact components used, but overall it is basically about the score and your ability to pay it pay. Whether it is a country or an individual, it’s essentially based on those factors.

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