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What is credit worthiness?

5 min read

What is credit worthiness

Written By

Morgan Bocknek
Morgan Bocknek

Reviewed By

Aoife Stapleton

Creditworthiness means how “worthy” you are of credit from lenders. Making sure you are as worthy as possible can help your finances in the long term.

What is creditworthiness?

Creditworthiness is a term that describes how you manage your financial obligations, and how “worthy,” you are of credit when approaching a lender. Worthy in this context doesn’t mean how deserving you are, but how likely you are to pay back what you owe. Creditworthiness is determined by multiple different factors, including your financial history, and how often you’ve fully repaid your outstanding debts.

If your goals of the moment involve things that require money, like a house or car, creditworthiness should be on your radar. Wondering what happens if you don’t have good creditworthiness? No need to worry, there are actions you can take today, for free, that can help you get approved, or even preapproved for loans in the future.

What factors affect creditworthiness?

Your creditworthiness is influenced by different factors that lenders will take into consideration when they are deciding to approve a request for credit. Some of the most common include payment history and credit behaviour, credit utilization ratio, and the length of your credit history. Lenders may also consider the types of credit you have in the mix, new credit applications you’ve made, and inquiries made on your accounts. Your credit report, which includes your credit score, is also part of your overall creditworthiness.

Payment history and credit behavior

Your payment history shows potential lenders how reliable you are when it comes to repaying debts and bills on time. Before applying for a loan or mortgage, pull a copy of your credit report from a credit bureau to see the state of your financial well-being. The three major credit bureaus in Canada that provide this information are Equifax, Experian, and TransUnion. You can get typically get your credit score on these platforms annually for free. Most Canadian credit bureaus buy their credit information from FICO, a U.S.-based data analytics company focused on credit scoring services. When you access your credit report, it’s important to note your payment history plays a significant factor of 35 per cent, to calculate your credit score.

Credit utilization ratio

When you’re looking to borrow money, lenders consider your creditworthiness in their process to determine how likely you are to pay back a line of credit. Ever wondered how well you’re managing your debt at the moment? This is what a credit utilization ratio is for. It’s expressed as a percentage that is calculated by taking the amount of revolving credit you use, divided by the total credit you currently have at your disposal. If you want to maintain a good credit score, try to keep your credit utilization ratio below 30 per cent to look good to potential lenders.

Length of credit history

Lenders will judge your financial character not by how nice you are to them, but in part by how long your credit accounts have been open. A long track record of responsible conduct suggests that you will continue to be prompt and not default, which is music to a lender’s ears.

All active accounts that you have will show up on your credit report to paint a picture of how you’ve handled your debts in the past. Even if you close an account, it can show up on your report for ten or even twenty years, depending on the credit bureau. However, it doesn’t take decades to fix every slip-up. For example, bankruptcy won’t cast a shadow over your credit score forever; It only appears on your credit report for an average of seven years.

Types of credit and credit mix

There are different types of credit that you can have as an individual or business that contribute to your overall credit score, which in turn contributes to your creditworthiness. If you hold more than one type of credit, this is referred to as a credit mix. Depending on what kind of loan or mortgage you are applying for, lenders will model your creditworthiness according to different formulas. Generally, financial institutions want to know how you have managed different accounts over time.

It can be helpful to have different kinds of credit and accounts in the long term. This is called credit mix, and it shows lenders that you can handle a variety of responsibilities over time. There are four types of credit that show up on a credit report that lenders will most commonly consider:

  • Open accounts: An account where you are required to pay the full amount each month and are not permitted to carry a balance over time.

  • Installment loans: A loan that is paid back, typically with interest, through monthly payments.

  • Revolving debt: The easiest way to understand revolving debt is to think of your credit card or a line of credit. You can borrow money, pay it back right away to avoid interest or pay it over time. Once you’ve paid, you can borrow it right back again.

  • Mortgage accounts: Interest rates on mortgage accounts can be fixed or variable, which sets them apart from other installment loans.

New credit applications and inquiries

Even though having a credit mix is good in the long term, newer credit cards and lines of credit can lower your creditworthiness in the short term. Recently opened accounts bring down the average age on your credit history and can dock you some points on your credit score, since this signals you have recently asked lenders to take on financial risks.

When a potential lender is considering an application you’ve made, they may make an official request to view your credit report. Even though they’re just looking, depending on other factors in your report, like how many lenders are making inquiries. These queries into your history can your credit score because the appearance of shopping around for a lender could indicate you may not be able to pay back your loan.

What are the benefits of good creditworthiness?

Having good creditworthiness can help you achieve all kinds of financial goals. At a base level, you are continuously building trust with lenders and creditors all the time. Maintaining and building this trust in the long term can be imperative when you are seeking approval for credit applications and can even lead to preapproval. For example, if you are applying for increased credit to purchase a house or car, good creditworthiness contributes to how likely you are to be approved for financial support. If you start to shop around for this kind of big purchase, having good creditworthiness can help you to get preapproved or prequalified for loans. In this situation, you have more negotiating power and are a stronger candidate. When looking to buy a house, having preapproval for a mortgage or down payment makes you a better candidate to have an offer accepted, compared to someone who is awaiting approval.

That’s not all. Good creditworthiness allows you to access enhanced financial opportunities. This can include accessing lower interest rates on loans. When you have a lower rate, you pay less interest over time on a loan, compared to someone who has a lesser credit score and is charged higher interest rates by a lender because they are considered higher risk.

How can I improve my creditworthiness?

If you don’t have good creditworthiness, there are simple steps you can take to improve it.

By building a positive credit history, lenders will view you as more trustworthy and may be more likely to approve your application for a loan. First, pay your bills on time. By ensuring you are making your payments in a timely manner, your credit score will gradually improve. If you’re late on payments, getting these outstanding debts paid can also positively influence your creditworthiness.

Another way to improve your financial reputation is by reducing how often you use your credit card. Managing your credit responsibly in this way will lower your credit utilization ratio over time and contribute to building a positive credit history.

The easiest way to start to improve your creditworthiness is to regularly review your credit reports. Spending habits can change over time, and you may not realize how much your buying patterns may be affecting your report. By checking in a couple of times a year, you can avoid big surprises down the line when it counts.

What is the difference between creditworthiness and credit score?

It’s important to understand the difference between your creditworthiness and your credit score. They are similar terms but mean different things. Your credit score indicates your creditworthiness. Creditworthiness indicates how worthy you are of credit from a lender. Your fancy new job title and kind nature won’t win over someone who is considering you for a loan, but your credit score, a three-digit metric ranging from 300 to 900 tells them nearly everything they need to know. The score is a summary that indicates your financial responsibility based on how well you’ve handled your finances in the past.

A credit score is found on your credit report, which you can access for free from Canada’s primary credit bureaus once a year. This score is just one of multiple factors that influence your overall credit score. By having a high credit score, you have high creditworthiness. If your credit score is low, so is your creditworthiness. This metric is determined by multiple factors, not just your score. It also includes payment history and credit behaviour, for example.

Lenders will also consider your debt-to-income ratio (DTI) to assess creditworthiness. To find your DTI ratio in percentage form, divide your total monthly debt by your total gross monthly income. You will want to aim for 28 per cent, but up to 35 per cent is considered acceptable.

Want to get serious about improving your creditworthiness? KOHO has a credit-building tool that helps Canadians build their credit scores for only $10 per month.

Note: KOHO product information and/or features may have been updated since this blog post was published. Please refer to our KOHO Plans page for our most up to date account information!

Morgan Bocknek

Morgan Sevareid-Bocknek is a Toronto-based journalist. She is an investigative reporter at the Toronto Star and has reported for The Associated Press and The Globe and Mail.

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