Creditworthiness and Affordability – Which is Which

Posted by Ben Tumilty in Credit Reports on 22 February 2019 - Ben is a Credit Analyst at checkmyfile

When reading the small print on most applications for credit, you’ve probably noticed two words regularly popping up: Creditworthiness and Affordability. Both of these measures are used by a vast majority of 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 place their own value on each type of information, and as such one might be more important than the other to some lenders, but you could see a complete reversal from others. Ideally you should aim to be able to prove both 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, if you have any Cifas entries and in some cases, any security against the loan, are factored into your Creditworthiness.

This is irrespective of the balance on your credit accounts, and as such the amounts in question on each of your credit agreements are unlikely to impact on how lenders view your ability to meet your repayments.

What is Affordability?

In essence 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 into the amount you already owe as part of 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 their income and higher outgoings) would prevent you from being able to make payments.

What’s the difference?

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 that’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 because without any Credit History to your name, 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 to potential lenders for the best chances of getting accepted. We always try to emphasise the importance of your Credit Report but 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.

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.

Updated 22/02/2019 by Jamie Mackenzie Smith

The Advantages of a Multi-Agency Credit Report

These days your Credit Report can be checked for any number of reasons throughout the year, including background checks during job applications, landlord checks and even from insurance or utility providers when you shop around for quotes.

Published on 17 May 2019 by Paul Anderson Riley

Full Article

What Lenders Want To See On Your Credit Report

Your Credit Report holds a huge amount of information about you and your past relationship with credit. It’s collated from a wide variety of sources, is always changing and plays a major part in any lending decision - but you shouldn’t be afraid of what it shows.

Published on 2 May 2019 by Sam Griffin

Full Article

What Credit Searches Mean

One of the most commonly misunderstood aspects of Credit Reports are the credit Search Footprints left on your report whenever someone accesses your file.

Published on 25 Apr 2019 by Kirstie Day

Full Article

How to dispute an account error on your report

Whether you’ve been turned down for credit in the past and have checked your Credit Report to make sure there’s nothing there harming your chances, you’re checking ahead of making an application, or you’re just looking to make sure everything is as it should be, there’s never a good time to find a mistake with the information on your report.

Published on 17 Apr 2019 by Kelly Luff

Full Article

Your Rights When Cancelling a New Credit Agreement

For most people applying for credit the main concern is whether or not they will be actually get accepted. But occasionally a change in circumstances (or even just a little time to reflect on your purchase) means that a bigger concern might be whether you can change your mind and withdraw from a credit agreement (be it a credit card, personal loan or other credit facility) after it’s been granted, potentially preventing you from taking on additional financial responsibility that you no longer want or need.

Published on 18 Mar 2019 by Tom Magor

Full Article

What Information Is On My Credit Report?

If you’ve ever taken out a loan, credit card, or other form of finance, you’ll know that the difference between acceptance and rejection relies heavily on the outcome of what the lender finds when it checks your Credit Report.

Published on 4 Jan 2019 by Paul Anderson-Riley

Full Article

Can Right to Erasure Get Rid of Bad Credit History?

General Data Protection Regulation (GDPR for short) was introduced on 25 May 2018 and unless you’ve managed to avoid the internet and checking your emails completely for the past year, you’re likely to have been bombarded with messages from nervous sounding websites updating their data policies.

Published on 3 Jan 2019 by Jamie Mackenzie Smith

Full Article

Why Searches Can’t Be Removed From Your Credit Report

The Searches section of your Credit Report shows you who has accessed the information on your Credit Report within the last couple of years. This effectively acts as a log of when you’ve checked your own Report, as well as a record of lenders checking as a result of applications for credit in your name. You’re also likely to see searches relating to prospective employers, landlords, insurance companies and other identity checks.

Published on 2 Jan 2019 by Beth Jennings

Full Article

How To Take Out Credit When Overseas In The Armed Forces

It’s no secret that the number of the UK’s active military personnel is set to decline further between now and 2020, but of the 145,000 UK Regular Forces across the Army, Navy and Air Force in 2018, as many as 18,500 served overseas during that time. With the recent news that the Army will accept recruits from commonwealth countries as well, a further portion of our armed forces is likely to be based overseas in the coming years.

Published on 27 Dec 2018 by Jamie Mackenzie Smith

Full Article

Why Your Credit Report is Like A Financial Dating App

We’ve spoken in the past about the link between a higher credit score and your romantic prospects, but the two topics might be even closer together than you think. That’s thanks to an emerging trend of dating apps that put a greater emphasis on your dating history in order to help potential future dates better assess whether you’re what they are looking for.

Published on 5 Dec 2018 by Jamie Mackenzie Smith

Full Article
keyboard_arrow_left

keyboard_arrow_right

We are rated number 1 for customer service on