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.

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Updated 22/02/2019 by Jamie Mackenzie Smith

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