Underwriting & credit
Creditworthiness: Definition & Example
What Is Creditworthiness?
Creditworthiness is a lender’s judgment of how likely a person or business is to repay borrowed money on time, based on credit history, income, debts, and assets.
What does creditworthiness mean?
Creditworthiness is broader than a credit score. The score summarizes credit history, while a full evaluation also considers capacity to repay (income and debt-to-income ratio), assets and reserves, and the collateral or terms of the loan.
Consumers improve creditworthiness by paying bills on time, keeping credit card balances low relative to limits, avoiding unnecessary new credit, and building a longer history.
Lenders must evaluate creditworthiness without discriminating on prohibited bases under the Equal Credit Opportunity Act, and many use alternative data to evaluate people with thin credit files.
Creditworthiness example
A small business applies for a $50,000 line of credit. The lender reviews the owner’s personal credit score of 735, two years of business tax returns showing growing profit, a debt service coverage ratio of 1.6 on existing loans, and $40,000 in business savings, and concludes the business is creditworthy.
Related terms
- Credit ScoreA credit score is a three-digit number, usually from 300 to 850, that estimates how likely a person is to repay debt based on the information in their credit report.
- UnderwritingUnderwriting is the process a lender, insurer, or landlord uses to evaluate the risk of an applicant and decide whether to approve them, and on what terms.
- Debt-to-Income RatioDebt-to-income ratio (DTI) is the percentage of a person’s gross monthly income that goes toward monthly debt payments, including housing, car loans, student loans, and minimum credit card payments.
- Thin Credit FileA thin credit file is a credit report with too few accounts or too little history to generate a reliable credit score. People with no credit record at all are called credit invisible.
- TradelineA tradeline is an individual credit account listed on a credit report, such as a credit card, auto loan, mortgage, or student loan, along with its balance, limit, and payment history.
