When reading the small print on most credit applications, you’ve probably noticed two words regularly popping up: Creditworthiness and Affordability. Both of these measures are used by most lenders when assessing your application, so understanding what each one means goes a long way to explaining why you may or may not be accepted for credit.
Each lender will calculate your Creditworthiness and Affordability differently. Not only that, but lenders will also rate the importance of these factors differently too. For instance, some lenders may have high Affordability requirements, while other lenders focus on finding the most creditworthy customers. Because of this, it’s not possible to say whether one is more important than the other. Ideally you should aim to be able to prove that you have both strong Creditworthiness and Affordability in order to impress lenders.
What is Creditworthiness?
In essence your Creditworthiness is how you have – and how you continue to – maintain your credit agreements. By seeing whether or not you have met your repayments on time in the past, or if lenders have had to chase you to reclaim debts owed, a prospective lender can work out how likely you are to make their payments too.
In addition to your Credit History, elements such as whether you’re registered on the Electoral Roll, your Financial Associations and, in some cases, any security against the loan are factored into your Creditworthiness.
This is irrespective of the balance on your credit accounts. Your outstanding balances will not affect your Creditworthiness or Credit Rating, but may be taken into consideration when the lender calculates your Affordability.
What is Affordability?
Affordability looks at whether you can afford to make the required monthly payments for a credit agreement, taking into consideration your monthly income and any other regular outgoings if your application is successful.
Lenders also look at your outstanding debt when assessing your overall Affordability. If you are applying for credit, particularly any form that requires consistent payments over a sustained period, lenders will look at the amount of outstanding credit you currently have.
Similarly, if you already hold a number of credit cards which give you a large amount of available credit and you apply for another credit card or unsecured credit such as a personal loan, hire-purchase or a lease purchase, lenders may decline you on this basis. If it looks like you would struggle to repay all your credit agreements if you ‘max them out’, lenders are often reluctant to offer you more credit and risk making this situation worse, even if there are no signs that it’s something you’re likely to do.
The Affordability aspect of your application for credit is not shown on your Credit Report, although your active credit agreements and their balance will show, and this information is factored into a lender’s checks. For some credit applications (usually when borrowing larger amounts, such as a loan or mortgage), you may need to provide proof of your income and outgoings before being assessed by a lender.
Increasingly, lenders are being held to responsible lending policies, which means they have to ensure the customer can not only afford to make payments, but that they can do so comfortably. To do this, your finances are sometimes ‘stress tested’ to see if external changes (such as an increase in the Bank of England Base Rate, changes to your income, or higher outgoings) would prevent you from being able to make payments.
What’s the difference between Creditworthiness and Affordability?
Although on the face of it the two seem quite similar, they are effectively two sides of the same coin. Affordability looks at whether you’re able to afford a loan and Creditworthiness assesses how likely you are to actually pay it.
Say for example you’re a millionaire with a six-figure salary who’s never taken out a loan or form of credit in your life. Even if you could easily make the monthly loan repayments, you might not be granted one if you don’t have any Credit History to your name. This is because lenders won’t be able to see any evidence of how reliably you’ve managed payments in the past. In this case you’d have great Affordability, but poor Creditworthiness.
Alternatively, if you had a spotless Credit History from several credit cards, active loans and a mortgage but only just enough income to pay for it all, you’d have excellent Creditworthiness, but poor Affordability, and most lenders would think twice before offering you credit.
That’s why it’s important to be able to demonstrate both strong Creditworthiness and Affordability to potential lenders for the best chances of getting accepted. Checking your Credit Report for yourself allows you to see the exact information that will be used by lenders when they work out your Creditworthiness. Other factors that affect your Affordability, such as your account balances, can also be found on your Credit Report.
Regardless of how healthy your Credit Report is, if you cannot afford to repay what you are looking to borrow then you will certainly find it difficult to obtain the credit for which you are applying.
How do I improve my Creditworthiness?
Your Creditworthiness is primarily based on the health of your Credit Report. Reported credit accounts that show a long, consistent history of being paid on time each month will boost your Credit Rating. Normally, the longer the accounts have been open, the more positive the influence will be.
Lenders will view these positive accounts as evidence of you being a reliable borrower who routinely makes monthly payments on time – in other words, the exact type of customer that they’re looking for.
A long and consistent history of paying your credit accounts on time and in full – especially over many different account types – is the foundation of strong Creditworthiness.
Any missed payments will be recorded negatively on your Credit Report, and these will damage your Creditworthiness. It’s therefore best to try and ensure that all monthly payments are made on time without fail.
How do I improve my Affordability?
Lenders will consider a customer to have high Affordability if their income easily surpasses their outgoings, current financial commitments, and available headroom on existing accounts.
If your income is at risk of being overtaken by your expenditure and debt, then lenders may consider you to have low Affordability. Reducing outstanding balances and monthly spend, and increasing income (easier said than done), can go towards improving your Affordability.
How do I check my Credit Report?
If you haven’t already, you can try checkmyfile free for 30 days, then for just £14.99 a month afterwards, which you can cancel online, by phone or by email.
You’ll get access to your Multi Agency Credit Report, which collates your complete information from the three Credit Reference Agencies – Equifax, Experian, and TransUnion – all on the same, easy to use platform. Should you need any assistance, our professionally qualified Credit Analysts can be contacted through your account.
Updated on 19 August 2020 by Sam Griffin
