Is Credit Score The Only Determinant Of Creditworthiness
Creditworthiness is how "worthy" one is of utilizing credit. If a lender accepts that the borrower will regard all debt obligations promptly, the borrower is considered being creditworthy. For a borrower to assess his/her creditworthiness, it very well may be testing and may bring about an irreconcilable situation with the loan specialist. Subsequently, most credit authorities survey the singular reliability and related danger of reimbursement to help banks in deciding if to lend to a borrower.
There are numerous fantasies about partner credit scores with creditworthiness. People frequently think that it is hard to approve and apply such fantasies to genuine credit situations. Here, we will attempt to demystify the way that credit scores don't for the most part have anything to do with creditworthiness and furthermore clarify the motivations behind why.
What is Creditworthiness?
Creditworthiness is usually measured through a credit score (that can range between 300 and 900). It is an assessment of the likelihood of a borrower repaying the loan or credit borrowed. Four main credit agencies in India provide credit scores and also detailed credit reports. These are CIBIL™, Experian, Equifax, and CRIF HighMark.
Generally, a higher credit score is considered better by lenders. However, credit scores may be different across different bureaus since each has its own set of credit calculation methodologies. All the credit bureaus are required to provide borrowers with at least one free credit report every year through their respective websites.
While credit scores are often used by lenders to determine a borrower’s capability to repay, it does not necessarily define the borrower’s creditworthiness. This is because a borrower may be capable of repaying a credit or loan, however, he/she may not necessarily be willing to repay all the borrowings.
How are credit scores calculated?
Financial institutions like banks and NBFCs that offer credit to customers periodically share data with credit bureaus. These, in turn, calculate the credit score of borrowers by using proprietary algorithms. Several parameters influence the credit score of a borrower, some of them are as below:
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Repayment history: Has the borrower been making repayments on time or have there been any defaults?
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Credit inquiries: What is the frequency of enquiries related to credit or loans?
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Credit mix: What kind of balance is maintained between secured and unsecured loans? Does the borrower have a lot of outstanding debt?
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Credit utilization: What is the rate of increase in debt over some time? Is the borrower taking on more debt? Is he/she utilizing available credit limits fully?
Reference; Is Credit Score The Only Determinant Of Creditworthiness
