What is Creditworthiness? How Your Credit History Affects Credit Card Approval

Creditworthiness is all about trust. It’s about having confidence that you will repay what you borrow, and lenders take it very seriously. Paying your bills on time is like returning your friend’s car with a full tank of gas.

But if you’ve been dodging payments or maxing out your credit, that’s like returning the car with a flat tire and an empty tank — your friend probably won’t be lending it to you again anytime soon! 

Creditworthiness is simply a lender’s opinion on whether you are a good credit risk. Lenders judge this based on your credit history and credit score, among other factors.

Your creditworthiness indicates how responsible you’ve been repaying loans and credit cards. Lenders can get a pretty clear picture of your creditworthiness by looking at your credit report and credit score.

Let’s take a closer look at what creditworthiness is, how it takes your borrowing history into consideration, and why it matters when you apply for a credit card or loan. 

Think of creditworthiness as your financial reputation. Lenders want to know whether or not you’ll pay your bills on time, and a simple “trust me, bro!” isn’t going to cut it. They want mathematical proof. Or at least as close as you can get.

Credit History

Your credit history is your financial trail. It’s how you have been managing your borrowing, whether you have always been on top of it or have had a few slip-ups. Every time you borrow money, whether it is a credit card, a car loan, or a mortgage, the credit bureaus record the details in your credit reports, and believe me, they are relentless record keepers.

That history will work in your favor if you have been paying bills on time and using credit responsibly. But if you are often late making payments, your credit report will take on the aroma of last week’s garbage. Lenders want to see a long and clean credit history because it shows you have been reliable over time. 

Here is a list of negative items and how long they stay on your credit report:

That’s why you should aim to establish good credit early on and keep it. Old credit accounts are like an oak tree’s roots — they add stability to your financial picture. Closing old accounts is not generally a good idea.

You may not use them much, but they’re helping you improve your creditworthiness by extending the average age of your accounts.

Current Financial Situation

Lenders aren’t interested only in your past. They also want to know where you stand at the moment, financially. They’re asking whether you earn enough to manage your debts and whether you are being smart with what you have.

This is where your debt-to-income ratio comes in: how much of what you earn each month goes toward paying off your debts.

The lower that number is, the better. That means you aren’t stretched too thin. Lenders want reassurance that you have enough reliable income so that you aren’t just getting by paycheck to paycheck. If your money comes in fits and starts or you’re carrying too much debt, they’re going to be a lot more cautious about lending you money.

Here is an example of monthly income compared to debt:

You can calculate the debt-to-income ratio using this formula: DTI = Debt / Income = $1,250 / $3,650 = 0.34 x 100 = 34%

Your employment status counts, too. Lenders are wary of instability, so if you are one of those people who hop from job to job, don’t expect creditors to roll out the red carpet. A regular, long-term job is like having a well that never runs dry — it keeps giving you what you need day in and day out.

Credit Utilization

Your credit utilization ratio (CUR) is the proportion of your credit card limit you are using at any one time. Lenders prefer that you don’t max out your credit cards because they’ll suspect you’re living too high on the hog. A generally accepted rule of thumb is to try to keep your ratio under 30%.

For example, if your credit limit is $10,000, you should carry a balance no greater than $3,000. That shows lenders that you are responsible and not going hog wild with your credit.

Here’s an example:

Low usage means you have some room to handle unexpected expenses — that you haven’t bitten more off than you can chew. Plus, your credit score will improve if your credit utilization is low, which further reinforces your creditworthiness.

Paying your balances in full every month is the best way to keep utilization in check (and avoid interest charges). And don’t go asking for credit limit increases all the time; it makes you appear desperate, and that’s not a good look.

Your Credit Scores

Lenders look mainly at FICO and VantageScore to size you up credit-wise. FICO is the favorite; most lenders use it. VantageScore came along a little later, an invention of the three big credit bureaus that wanted to give FICO a run for its money. Both scoring systems work in the same ballpark, with scores ranging from 300 to 850, so whether you’re looking at one or the other, the numbers pretty much speak the same language.

The higher your score, the better off you are. VantageScore and FICO have a few differences. They weigh things a little bit differently in terms of calculating your score — factors such as how much attention to pay to your most recent credit behavior.

VantageScore takes a fresher view of things, whereas FICO leans more on the past, but at the end of the day, they’re both peering through the same door.

Your credit score falls into different categories, sort of like grades. FICO breaks it down like this: if you’ve got a score between 300-579, you’re in poor shape; 580-669 means you’re fair; 670-739 is good; 740-799 is very good; and 800-850 is excellent.

The higher your score goes, the more lenders will trust you with their money, giving you the reins of a prize horse. Keep your score high to enjoy the best credit cards and loans.

Here is a breakdown of the ranges:

All three major credit bureaus —  Experian, Equifax, and TransUnion — provide you with a credit score. It is as if you have three different judges looking at your performance. You get to know what exactly each one is saying about you, which in turn gives you an idea of how the lenders consider your creditworthiness.

And when your scores are too low, you’ve got to roll up your sleeves and start putting in some extra effort to push it higher. Big factors that influence your score include how well you have paid your bills, how much debt you have, the types of credit you’re using, the age of your accounts, and hard inquiries.

While both FICO and VantageScore track prior performance, credit mix, utilization, and age, they do not weigh them the same.

Your creditworthiness is very important and very personal. It influences many things — from whether you will get approved for a credit card to the interest rates charged on loans. It impacts your ability to get hold of financial products and services that can have a powerful effect on your lifestyle.

Credit Card Approvals

Whenever you apply for a credit card, the first thing lenders check is your creditworthiness. If your credit score is good, chances are that you’ll be approved for a card with a higher credit limit and better perks.

It’s like earning the blue ribbon at the county fair — you’ll get the best prize. But if your score is low, you may receive only a low-limit credit card or even be rejected outright.

A higher credit score means you’ll have an easier time getting approved for higher credit limits, lower interest rates, and you could be rewarded with more perks and rewards.

High scores can qualify you for premium rewards cards, offering cash back, miles, or points. If your score isn’t up to snuff, those extra goodies will be out of reach, and you may end up with a basic no-frills card. 

Credit Card Interest Rates

Your credit card interest rates are as tied to your credit score as a horse to its saddle. If you have a high score, expect an easy ride with lower interest rates since you’re seen as less of a risk.

But if your credit score’s broken down, you can expect to be hit with high rates. If you tend to carry a balance on your card, those high rates will sting you harder than a swarm of hornets.

Fair example: if your credit score is sitting pretty in the excellent range, you may get an interest rate as low as 16%. Rates jump up to a fat 24% if your credit’s only fair. Worse yet, you’re looking at APRs up to 36% if your credit’s ready for the glue factory.

That difference piles up if you carry a balance from one month to the next. So, keep those scores high, and you’ll save yourself some serious cash.

Here are some tips to lower your interest rate and save a pile of money:

• Bring down outstanding debt and improve your credit score with timely payments.

• Shop around and compare credit card offers from different issuers.

• Look into balance transfer options to consolidate high-interest debt.

• Call your current credit card issuer and negotiate a lower rate.

• Seek out promotional offers with low introductory rates.

Now, if your credit is looking rougher than a rancher’s knuckles, it’s time to call in the cavalry. A non-profit credit counselor will be able to help you establish a budget and show you how to dig yourself out of that hole of debt. They help get you back on track and keep things running smoothly.

Rewards and Other Benefits

Good credit, on the other hand, will qualify you for premium credit cards with fancy perks, including travel rewards, cash back, and access to airport lounges.

It’s like getting first-class seating on your next flight — which you may also be able to earn with your points and miles!

Loan Approvals

Your credit score also heavily influences whether or not you get approval for loans, such as a mortgage or car loan. The higher your credit score is, the better the approval odds will be, along with the possibility of lower interest rates that can save you a heap of money over time.

When your credit score is high, the lenders view you as less of a risk, somewhat like wearing a belt and suspenders to keep those pants up, come what may.

Lenders and credit card issuers typically view low credit scores as red flags and may not want to take assume the risk of approving you for financing.

But when your credit score is on the low side, getting approved for a loan becomes a challenge. It’s like trying to get a mule to budge when it’s set in its ways — it’s just not happening. In most instances, lenders either reject your application or hit you with sky-high interest rates that make borrowing a bitter pill.

Don’t be surprised if a lender asks you to recruit a co-signer to back up the loan. Think of it as getting stuck in the mud and calling for help to pull you out.

Managing your creditworthiness is like tending to a crop. It takes time, effort, and some good habits to keep everything growing strong.

Otherwise, you may find your credit score wilting faster than some forgotten tomato plant left in the summer heat. But with a bit of tender loving care, you can keep that score strong and continually reap the benefits of low interest rates, easier loan approvals, and those fancy credit card benefits we talked about earlier.

Check Your Credit Regularly 

You must monitor your credit report, just like you watch your fences, to make sure everything is in order. Mistakes are made; after all, you certainly wouldn’t want someone else’s financial mess haunting your report.

There are plenty of free tools and services that let you check your credit regularly without hurting your score. These include AnnualCreditReport.com, where you can access copies of your credit report from all three credit bureaus as often as once per week.

Think of it like watching over your financial garden: You want to weed out errors quickly because they may cause considerable damage if ignored. When you catch something that does not look quite right, act right away. You’ve got to act fast to protect a healthy credit profile.

Dispute Credit Report Errors

The credit bureaus have online facilities that let you lodge disputes when you find errors in your credit reports. You can challenge inaccurate information such as late payments that you made on time, hard inquiries you didn’t authorize, and any debts that are reported but are not yours. 

The credit bureaus have 30 days to follow up on your disputes and will fix your reports if they side with you. Now, this may take a little patience and paperwork, but I assure you, it’s well worth the time. 

Make a Financial Plan

Maintaining good creditworthiness isn’t just about avoiding pitfalls but also about preparing for the future. You definitely need a reliable budget to monitor your expenditures, manage your debts, and make timely payments. 

Having a financial plan is basically putting up a strong fence around your money; it keeps everything in line and makes sure nothing strays off. When you have a budget, you know exactly where your money is going and what you are saving for.

Budgeting is a simple — but important — part of financial responsibility. When it comes to credit, if it isn’t in your budget, don’t charge it!

It prevents you from being a wild spender so that when an emergency comes along, chances are you won’t be empty-handed.

When you have a good plan, you are in better shape for the surprises that life throws at you, whether that be the truck breaking down or a big medical bill. It’s about being smart and thinking ahead. Without a plan, your finances may drift, and that’s no way to take care of your money.

Creditworthiness is the grade you earn for financial responsibility. A good credit score opens many opportunities for getting attractive loans, mortgages, and credit cards. A high credit score is, therefore, worth the effort it takes to build and maintain it. 

Thing of your credit score as an indication of your reputation in financial circles. With a good score, creditors know you always pay your debts on time, so they trust you when you apply for more credit. But just like everything of value, it takes time and effort to build, so don’t expect the results to appear quickly. 

Just keep at it, and before you know it, lenders will be lining up like folks waiting for the “fresh donuts” sign to light up at the local shop.