Creditworthiness is a measure of the likelihood of an individual or business to repay their debts. It is an indicator of how much debt an individual or business currently has, credit scores and whether or not additional credit is viable. There are numerous ways in which creditworthiness can be assessed, such as by looking at employment status, level of income, risk factors and economic conditions.
These factors are a key part of the assessment process because they offer further insight into financial standing. For example, if an individual is unemployed, the likelihood of them affording a debt repayment is low. If an individual has a particular amount of income, but their discretionary income is low, then their creditworthiness may be affected. This is also the case if an individual already has a range of debts to their name. In this case, then they are likely to be regarded as high risk, which means that they are not creditworthy.
Risk factors are a key part of the process. By considering any risk that may affect the repayment process, a lender will be doing its due diligence.
If a lender considers late payment behaviour as a risk, then this is a good way of assessing creditworthiness. It may be an indicator of future behaviour, which will affect repayments.
Alternative data may become key for creditworthiness assessment. This may involve assessment of non-traditional assessment methods. It may include factors such as looking at cable TV payments, rent payments and bank account information. It may even involve assessing social media interactions.
Using this form of assessment may lead to lower costs incurred overall, because it simplifies the process.
The 5Cs remain an integral part of creditworthiness assessment. Character, capacity, collateral, capital and conditions are examined before granting credit.
Qualitative and quantitative aspects of the credit application are considered.
To improve the chances of a positive creditworthiness assessment:
- Be willing to bear some of the risk yourself
- Be transparent about what you will be using the credit for and indicate when you would need the funds
- Be fully transparent about how you will repay the loan