Credit Worthiness: Are you worthy

Abstract

Now, let us try to understand what creditworthiness is and how do we measure it. The underlying principles of determining an individual’s creditworthiness use the Five C’s of Credit, which helps the lender decide whether to issue a credit or not. Credit bureaus collect repayment history across different credit lines to measure an individual’s financial discipline and assign a credit score that quantifies the customer’s creditworthiness. The credit score thus calculated mainly assesses the Character and the Capacity of the customer. For example, in India, CIBIL’s credit score is calculated based on Payment History (30%), Credit Exposure (25%), Credit type and Duration(25%), and other factors such as hard inquiries for a loan (20%). Financial institutions acquire this credit score from the bureaus and use it to evaluate loan applications. Ironically, these institutions ask for credit history to give a loan, but they deny customers the chance to create credit history by rejecting a loan. It is similar to the dilemma of a fresh graduate who is asked for work experience but not given jobs to gain it in the first place.