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Have you ever wondered why a bank decides to lend money to one person but not another? It’s not because the bank advisor thinks one person is funnier or smarter than the other. Personal opinions don’t have any place in the financial world. Instead, they make a fact-based assessment of your ability to repay a line of credit or personal loan.
Your creditworthiness plays an important role in this decision-making. It helps a lender determine whether they should offer financial help when you need it or deny your application.
With so much riding on your creditworthiness, it’s important you know how you can cultivate creditworthiness. Keep reading to find out more about this financial measurement and what you can do to improve your chances of approval.
What is Creditworthiness?
Break the word “creditworthiness” down into its parts, and you’ll find that it refers to how worthy you are of credit — whether it’s a personal loan, mortgage, or line of credit.
Regardless of what you want to borrow, your creditworthiness predicts how well you’ll handle a loan, should a lender approve your request. The more creditworthy you are, the more likely you’ll pay back what you owe on time without any issues.
The less you are, on the other hand, the less confident a lender may be about your borrowing habits. Poor creditworthiness casts doubt on your ability to pay back your debts, so it may complicate how easily you get a loan or line of credit.
How is Your Creditworthiness Determined?
Plenty of things factor into your creditworthiness. Most lenders take a holistic view of your current financial situation and past borrowing habits before they decide.
Here are some of the biggest factors included in this decision-making.
Collateral
Some lenders provide secured loans, which are backed by an asset. This is collateral they may take as payment should something stop you from repaying your debt. Collateral acts as insurance, which may reflect favourably on your application. Lenders take on less risk with secured personal loans, so you may have better luck at being approved.
Credit Score
For unsecured options — loans that don’t put collateral on the line — your credit score may play a bigger role in your application. Lenders check this to see how you’ve handled loans and lines of credit in the past.
Some lenders only grant funds to borrowers who have scores above prime. However, you may find lenders that offer loans and lines of credit for bad credit in Canada.
Debt-to-Income Ratio
Your debt-to-income ratio (DTI) may also play a role. This ratio reveals how much of your income goes towards debt each month. If you already spend most of your paycheque on debt, you might not have enough cash on hand to juggle another payment.
Income and Bank Information
Lenders may also look at your income and pay schedule to confirm you have what it takes to pay a potential loan. They also want to see you have a valid bank account to ensure they can direct deposit your funds. Some mortgage lenders may even check the balances in these accounts to see if you have a few months’ worth of payments saved.
How Can You Improve Your Creditworthiness?
Improving this measurement is all about making yourself look attractive to a lender. You need to start laying down the ground works to show you pay bills on time, which may take some time. If you can’t wait in an emergency, consider secured loans or lines of credit for bad credit in Canada carefully.
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