Creditworthiness Explained - How Lenders Determine the Credit Risk of a Person

A man using his credit card online

You may be currently considering your borrowing options if you’re planning on taking out a loan to make a large purchase or getting a credit card to help you cover monthly essentials. 

Getting credit isn’t always as simple as many might assume, and likewise for the provider; lending money to people you don’t know is a big risk.  

Whoever you intend to borrow money from, whether it’s a bank or private lender, they will need to assess your personal financial situation beforehand to see how likely you are to repay it and to lower the overall risk of lending you money. 

Your creditworthiness is one of the main factors that lenders and creditors look at when determining your eligibility to borrow, but what exactly does it mean?

What is creditworthiness and how do lenders assess it? 

To define the meaning of creditworthiness, the term refers to whether or not an individual is worthy of receiving financial credit from a lender, and to what extent they are worthy of borrowing. 

To determine a customer’s creditworthiness, the lender (bank, private company, credit union, etc) will analyse your financial history to see how reliable you have been with paying money back in the past. 

Why is your creditworthiness important? 

If a lender can see that you haven’t been sensible with previous credit, such as any missed payments, they will be less inclined to lend you the money as you pose a much higher risk compared to customers who have a record of regularly paying credit back on time. 

Many lenders will reject your credit application if you have a proven history of failed payments and erratic spending, while others may be more prepared to take the risk and will lend you money, but with a much higher interest rate to account for this risk. 

If, on the other hand, you have a good credit history, you’re likely to be offered the best deals and interest rates on the market. 

How is your creditworthiness checked? 

The main way in which your bank or private lender will assess your financial history is by looking at your credit score, which is a representation of your creditworthiness in number form.  

Your credit score is then placed into one of the following categories: 

  • Very poor 
  • Poor 
  • Fair 
  • Good 
  • Excellent 

Your credit score will usually come with a credit report, which provides further detail and information about your credit history. 

The lender can find out your credit score via credit reference agencies (CRAs). In the UK, there are four CRAs that hold data on British consumers, including Experian, TransUnion (previously Callcredit), Equifax and Crediva, and each CRA has its own scoring system, so it may differ depending on who they check it with. 

Certain lenders may simply choose one of the CRAs to check your repayment history, while others will check more than one, perhaps all, to make sure they get the best picture of your spending habits. 

To find out the best place to check your credit score online, see below. 

What other factors do lenders look at to determine your creditworthiness? 

For some lenders, your credit score and report may not be enough. It all depends on the type of borrowing you require as well as your chosen company’s terms and conditions for accepting people for credit. 

Whether you’re looking to take out a mortgage, personal loan or a credit card, the lender may also want to see one or more of the following: 

  • Your salary (bank statements) 
  • Your occupation (as well as previous jobs) 
  • Existing debt (student loans, credit cards, other loans, etc) 
  • Investments (retirement fund, bonds, stocks, etc) 
  • Assets (savings accounts, etc) 
  • Your address and how long you’ve lived there for (as well as previous addresses) 

Generally, lenders will prefer to lend to someone who has a stable financial background, and things like high-value assets can help prove that you are less of a risk. 

How to check your credit report and score 

If you want to better understand how your creditworthiness is viewed by lenders and creditors, checking your credit score should be your next step, and you should do this regularly to keep on top of your financial situation. 

Checkmyfile is a credit-checking website that uses all four UK credit reference agencies to give people an overall credit score and a much more detailed report, so that you don’t have to waste time checking with each CRA individually.

When you receive your detailed report, you’ll be able to see the information that lenders see when they assess your credit application, and you’ll also be able to easily identify any potential mistakes that may be holding your creditworthiness back. 

Checkmyfile is free for the first 30 days, after which there is a monthly payment of £14.99. Cancelling is easy, however, so if you don't want to pay, simply cancel your account!

Read more: Ways to Improve Your Credit Score 

Financial advice from Bobatoo 

While borrowing money can make larger purchases more accessible to UK consumers, you must always be cautious when doing so. 

Always be aware of the terms and conditions of the loan, as well as how you are expected to pay back the credit. 

You must be able to afford the repayments every month, and you must do your best to avoid missing any payments, as this will have a negative impact on your credit score, and will therefore affect your chances of borrowing in the future.

If you are struggling financially, or you are unsure and feel like you need professional advice, you should not put yourself in more debt. Instead, you should speak to a financial or debt advisor, which you can do for free via StepChange or Citizen’s Advice

For further information about credit scoring, be sure to take a look at our related guides below, and to check your score, simply tap the button for your free 30-day Checkmyfile trial - once your free trial ends, a monthly charge of £14.99 will apply, but if you don't want to pay, simply make sure you cancel your subscription:

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Related guides 

Credit Scores Explained 

Ways to Increase Your Credit Score 

Checkmyfile Review 

Personal Loans Explained - Should I Get a Loan Now?