Creditworthiness definition

What is Creditworthiness?

Creditworthiness is the opinion of a creditor or lender regarding the ability of a person or business to settle its obligations when due. This assessment extends to the expected future financial condition of the person or business. Creditworthiness is based on the credit applicationcredit references, and financial statements supplied to the party granting credit, as well as a credit report supplied by a third party credit reporting agency, such as TransUnion or Experian. One may also rely upon the prior payment history of the entity under review, as well as one's judgment of the character of the person authorizing payments. Some organizations use credit scoring models to convert this information into a score that is used as the primary basis for a determination of creditworthiness.

How to Improve Your Creditworthiness

There are several ways in which you can improve your creditworthiness, which are as follows:

  • Pay your bills on time. Pay your bills when due (or early), in order to show your probity in settling obligations.

  • Reduce your debt. You should take on debt and then pay it down, thereby showing that you are a responsible borrower who takes your obligations seriously.

  • Reduce your debt-to-income ratio. Your debt-to-income ratio is calculated as your total monthly debt payments, divided by your gross monthly income. A low debt-to-income ratio shows that you have lots of excess financial capacity that can be used to pay off your financial obligations.

The Risk of Default

The reverse of creditworthiness is the risk of default.

Related AccountingTools Courses

Credit and Collection Guidebook

The Interpretation of Financial Statements