Creditworthiness is a concept that refers to the ability of an individual or legal entity to repay a loan it has taken out. Banks and other financial institutions assess creditworthiness in order to minimise the risk of customer insolvency. This process involves an analysis of various factors that may affect the ability to repay a debt on time.
Factors affecting creditworthiness
Gross income
Gross income is one of the most important elements taken into account when assessing creditworthiness. It is a person’s total income before taxes and other mandatory contributions are deducted.
A higher gross income usually increases creditworthiness, as it suggests that a person has more resources to cover monthly loan instalments.
Credit history
A credit history is a record of all previous credit commitments and how they have been repaid. Regular and timely repayments have a positive impact on creditworthiness, while delays and defaults can significantly reduce it.
People with a good credit history are considered more reliable and are more likely to obtain favourable credit terms.
Financial liabilities
Current financial commitments, such as other loans, credits or credit cards, also affect creditworthiness. Banks analyse how much of your gross income is already allocated to repaying existing liabilities. The higher the debt, the lower the creditworthiness, as this increases the risk of insolvency.
Why is creditworthiness important?
Creditworthiness is crucial for people planning to buy a property. It assesses whether a person can afford a mortgage and whether they will be able to pay the instalments in the future.
Banks only grant mortgages to customers who meet certain creditworthiness criteria. For more on this topic, see the article on mortgages.
How to improve creditworthiness?
Debt control
One of the most effective ways to improve creditworthiness is to reduce existing debt. Paying off credit cards and other loans before applying for new credit can significantly improve your creditworthiness.
Timely repayments
Paying your financial obligations regularly and on time has a positive impact on your credit history. Even one late payment can lower your creditworthiness, so it is important to always pay your bills on time.
Savings
Having savings can also improve creditworthiness. Banks see people with savings as more financially responsible and less risky, which can lead to more favourable loan terms.
For more practical advice on buying a property, see the article on buying a flat step by step.
Summary - Creditworthiness
Creditworthiness is a key element in the process of obtaining a mortgage. Improving your creditworthiness can lead to better credit terms and increased chances of obtaining a loan.
Understanding and managing the factors affecting creditworthiness is essential for anyone planning to buy a property.
Finally, if you want to know more about the differences between variable and fixed lending rates, please read our article on the subject: variable or fixed loan rates.
