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What is credit worthiness? & how to check the creditworthiness

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What is credit worthiness? & how to check the creditworthiness, after providing detailed analysis for “Corporate Credit-Worthiness And Credit Rating“. Now here we are providing complete details for credit worthiness like – Things to be considered to check the creditworthiness of an entity, How to improve credit worthiness, Repayment History, Credit Score, Capacity, Assets/Collateral security, Existing Credit relations, Debt to Income Ratio etc. Now you can scroll down below and check more details on “What is credit worthiness?”

We often hear the word creditworthiness while discussing about loans.

Creditworthiness means the ability of an individual or a company or any other entity to meet the obligations created by the debt or loans obtained. It’s a parameter of a person’s ability to honor a debt within the time bound it is supposed to be. I found many financial intuitions and banks make call to those having an excellent creditworthiness to suggest them their attractive personal loans.

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Things to be considered to check the creditworthiness of an entity:

1. Repayment History:

Banks and financial institutions will ask for the credit reports which consist of the repayment history of any loans taken by the applicant previously. They will examine whether there is any default or delay in honoring the loan within the time period given. The more credit worthiness means more the chances of repaying the debt with satisfying all the conditions.

2. Credit Score:

Credit score is widely used by the banks in sanctioning the loans to the companies and other intuitions. Credit score is given by  Credit Information Bureau of India Ltd (CIBIL). If your credit score is lower, then the chances of getting loan is lower and vice versa. Credit score depends upon the previous history of honoring the debts of the borrower.

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3. Capacity:

This addresses the borrower’s cash flow and ability to repay the debt from ongoing sources of income .Unforeseen business difficulties will always arise.  The projected financial position of the borrower will indicate the capacity of the borrower to repay the debt in future.

4. Assets/Collateral security:

If you have some assets that can give the lender a feeling of confidence that you can repay the debt, then this would definitely be helpful in cases where the other parameters of credit worthiness do not result well.

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5. Existing Credit relations:

If your existing debts are huge in volume so that it takes to spend you’re a major part of your income in the future to repay these obligations then it would give the lender an inference that your ability to repay the new loan will be counter occupied by existing loans hence the chances of getting new loan is very difficult. If your current obligations are very nominal that they can be met with a smaller portion of your income then it improves the credit worthiness.

6. Debt to Income Ratio :

This ratio indicates how much percentage of your income will go for meeting the obligations. To find it yourself divide the monthly / yearly debt obligations by monthly or yearly income. The lower the rate better the position is and vice versa.

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How to improve credit worthiness:

  1. One can get a good creditworthiness by managing their debts to be a manageable portion of their income and honoring the bills on time.
  2. Having a good projected financial position. If your chances of having more reliable and consistent source of income in the foreseeable future then care should be taken so that this could be better presented in the projected financials.
  3. Close the unused credit cards as early as they become not necessary to use.
  4. Try to avoid obtaining too many credit cards.
  5. Go for a variety of credit types rather sticking to one type of credit.
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