Creditworthiness assessment

Credit risk and affordability together

A creditworthiness assessment is the evaluation a lender carries out to decide whether to lend and on what terms. In the UK it has two distinct but related limbs. The first is credit risk: the likelihood that the borrower will repay, informed by their history of managing credit. The second is affordability: whether the borrower can meet the repayments out of their income without undue difficulty or having to borrow further. Both must be considered; a customer may be a good credit risk on paper yet unable to afford a particular commitment, and responsible lending requires the lender to look at both.

This dual focus is a deliberate feature of UK regulation. The emphasis on affordability, not just the probability of default, is intended to protect customers from being lent amounts that technically get repaid but cause real hardship along the way.

What the assessment considers

A proper assessment draws on several sources. Credit reference data provides the history of how the applicant has managed borrowing, including any arrears, defaults or heavy existing commitments. Information the customer provides, and the lender's own records if they are an existing customer, add context. Affordability is assessed against income and essential and committed outgoings, so that the lender understands what is genuinely left to service the new borrowing.

Open Banking has strengthened the affordability limb considerably. With the customer's consent, a lender can see categorised income and spending directly from the bank account, which gives a more accurate and current view than recalled figures or broad assumptions. This reduces both the risk of lending to someone who cannot afford it and the friction of asking for payslips and statements.

• Credit history and existing commitments from credit reference data
• Income, essential costs and existing debt servicing
• Consented Open Banking data for a direct affordability view
• The lender's own policy rules and risk appetite

The regulatory duty to lend responsibly

The requirement to assess creditworthiness is a cornerstone of the FCA's responsible lending regime. CONC requires firms to carry out a reasonable assessment of creditworthiness before entering into a regulated credit agreement or significantly increasing credit, and to base that assessment on sufficient information, including about the customer's financial situation. The depth of the assessment should be proportionate to the type and amount of credit and the risk to the customer.

The Consumer Duty reinforces and extends these obligations. It expects firms to avoid foreseeable harm, which includes lending that a customer cannot sustainably afford, and to ensure products offer fair value and are suited to the customer's needs. A sound creditworthiness assessment therefore does more than protect the lender's balance sheet; it is the mechanism by which a firm demonstrates it has lent responsibly. Firms are expected to keep clear records of how each assessment was conducted, so they can show, if asked, that the decision was reasonable on the information available at the time.