This is the likelihood of ability or non-ability to repay debts. It’s a determinant of how much credit you will be extended as an individual or company.
Creditworthiness is important because it can prevent credit being extended to the wrong customer. For lending institutions, they will be better able to figure out which individuals or business entity are worthy of finance.
Ways to assess creditworthiness:
An assessment of promptness of payment – By examining how fast an individual or company pays its debts back, this can provide further insight into potential future behaviour. If payments are usually late, then this may have a negative effect on how creditworthy an entity is. If they pay back on time without fail, then they are reliable and can be predicted to repeat the same behaviour.
Checking creditworthiness of a customer – This means that credit scores are examined. It’s vital to watch out for problems that may affect the ability to pay.
Using alternative methods – Checking how active is the credit applicant on social media, in comparison to how promptly they answer their emails may be a good way of determining the decision to make. By examining atypical information, such as rent payments, cell phone payments, bank account information or a person’s occupation, this may give even more insight into how likely they are to make timely repayments. This type of information helps lenders get more context into the life of the applicant, so if their discretionary income is too low, then they won’t be able to afford even more credit. There are pros and cons to this method of assessing creditworthiness, so it’s vital to consider both sides.
On the plus side, it may help to increase access to credit. it may also lead to improved assessments by providing real-time information.