Factors That Determine Your Creditworthiness

You credit score is based on a number of factors and helps banks, landlords, and other parties to make important financial decisions.

The most important factor that determines your credit score is your payment history, i.e. whether you have missed or late payments, how late you are, and whether you have consumer proposals, bankruptcies, delinquencies, etc. Your payment history accounts for 35 percent of your score. The amounts owed are another important factor. The score accounts for mortgages, personal, auto, and other loans, credit card debt, lines of credit, and other amounts owed. Borrowers who regularly get close to their limit and those who max out their cards usually have a lower score than regular payers. This factor accounts for 30 percent of the score. The number of account balances is also important, whether credit card balances or bank loans. Borrowers with many outstanding balances are considered risky. The length of your credit history is also a factor that determines your creditworthiness and accounts for 15 percent. The length of time different accounts have been open is accounted for. Thus persons who are new to credit or have limited exposure are not the ones with a perfect score. The type of credit used accounts for 10 percent and represents your credit mix. The score considers mortgage loans, accounts with finance companies and credit card issuers, retail accounts, and others. New credit is yet another factor. Borrowers who open multiple accounts within a short period are perceived as unable to handle debt responsibly.

Factors That Financial Institutions Consider

The factors vary from bank to bank and depend on the financial product. For example, issuers that offer secured credit cards approve candidates with a low or average credit score. Airmiles cards with perks such as low interest rates, travel protection, and flight discounts are offered to creditworthy applicants with high income levels. Besides credit history and income level, financial institutions also look at the borrower’s bill payment history, current job and employment stability, and others. Banks also use different set of criteria for personal and business loans. When applying for a business loan, financial institutions often require that companies offer collateral such as securities, account receivables, inventory, plants and real estate, and equipment. Banks prefer liquid assets such as cash and others. The trustworthiness of the applicant is also taken into account, including their education, skills, references, and business experience. The cash flows of a candidate are an important factor that helps banks determine whether diverse sources are available for loan repayment. Other factors include the state of the economy, liabilities and loan amounts, competitors, industry and sector, and customer base. The company’s equity and net worth are important indicators. In many cases, financial institutions require that applicants present documents such as appraisals, business plans, financial statements, and others.

Other documents include your business and personal credit report, resumes, legal documents, bank statements, and income tax returns. All these are taken into account to determine trust- and creditworthiness. Your bank may request legal documents such as commercial leases, franchise agreements, copies of agreements and contracts, and your articles of incorporation. Other documents to present are any registrations and licenses you have. Finally, financial institutions also check the applicant’s background, including his educational and criminal record, name, address, and others. You can submit this as a separate document or together with the application and paperwork required. While banks usually offer loans to creditworthy applicants, there are other reasons for rejection such as poor state of the economy or particular sector.