Creditworthiness: what influence your creditworthiness has

Are you creditworthy? If you would like to take out an installment loan, your creditworthiness will be checked. But what exactly is behind the term and who actually decides whether someone has a good or bad credit rating?

The better the credit rating, the higher the chances of getting a loan

What is creditworthiness?

Creditworthiness means – colloquially speaking – creditworthiness. The term creditworthiness comes from the latin bonitas for "excellence," and in finance it is used figuratively to mean the excellence of a person's financial manners. The question behind this is how they are financially positioned, whether the amount of their income and the amount of their expenses are in an economically acceptable ratio, in other words: whether this person knows how to handle money. One's own behavior, such as reliability in loan repayments, has a major impact on credit ratings, as it allows conclusions to be drawn about a person's creditworthiness.

The influence of creditworthiness on the credit conditions offered

The lending bank tries to accurately assess the risk of lending before signing the contract. In order to check your creditworthiness, the bank takes its own measurements and also calls up certain data about the applicant from a credit agency. On the basis of this information, the bank finally weighs up whether the customer is in a position to service the installment loan regularly and reliably. The more badly the creditworthiness check turns out, the more highly it classifies its own risk and the more badly credit conditions offers it to the customer. In other words, the better the credit rating of the customer, the better the loan rate offered and vice versa.

The bank uses these criteria to assess your creditworthiness

The details of the methods by which the bank itself draws conclusions about a customer's creditworthiness are a trade secret. Nevertheless, it can be stated that the following questions, among others, play a major role in any credit assessment:

  • Where does the applicant live? Inhabitants of highly indebted areas are rated worse.
  • Has he been working at his current employer for a long time or does he change jobs often? The duration of the employment relationship also has an influence on the classification.
  • Is the customer still on probation or has a fixed-term employment contract? Fixed-term employment contracts carry a higher risk of insolvency.
  • How high is the income, how high are the monthly expenses? From this the bank recognizes among other things, whether he has at all the necessary margin, which the credit demands of him.
  • How many loans does he already have, and does he service them reliably? From this, it can be deduced how it will proceed with new loans in the future.

Like SCHUFA & co. Evaluate your creditworthiness

Credit bureaus are another source for banks to use to obtain information about a prospective customer's creditworthiness. Credit bureaus are companies that store information about the economic activities of individuals. The three best-known credit agencies in germany are SCHUFA, burgel wirtschaftsinformationen and creditreform.

In order to obtain this information, the credit bureaus have concluded contracts with banks and lenders for the transfer of data. They collect this data, assign it to a person or a company and then create a so-called scoring – also called creditworthiness index. Credit bureaus thus estimate the creditworthiness of individuals on the basis of their collected data. According to SCHUFA alone, it has around three quarters of all germans in its file.

This is how your individual credit score is created

The term scoring refers to an analytical, statistical procedure used to calculate how likely the applicant is to be able to service the loan regularly and reliably. Schufa thus provides lenders with an important tool for better assessing the customer's creditworthiness and thus the risk of granting credit.

Getting a loan without a credit check is impossible in germany. Because especially when it comes to large sums, the banks want to make sure that you can service your loan. A credit report is therefore requested for every credit application.

Among other things, schufa collects data on the movements on current accounts, credit cards, installment loans or leases, each including the account numbers, loan amounts or terms. In the case of installment loans, for example, it records whether a customer has repaid previous loans on time and what the current state of his finances is. Negative schufa entries such as a burst loan significantly reduce the likelihood of a loan approval.

Measures you can take to improve your credit rating

Which detailed behavioral measures lead to a better SCHUFA score is difficult to judge, because schufa does not communicate its criteria. Some measures, however, almost certainly contribute to a more positive rating of your creditworthiness:

  • Always pay bills on time – reminders and collection procedures have a negative effect.
  • Handle credit inquiries carefully: if you are about to compare several loans with each other, make sure that the credit institution does not submit a so-called "inquiry credit" to schufa each time, but only an "inquiry credit condition". Otherwise, schufa will assume that you have problems obtaining a loan every time it makes a further inquiry on your behalf – and will evaluate this negatively. If an "inquiry credit" is made on the part of the lender, the schufa understands that it is only a preliminary inquiry.
  • Cancel unnecessary current accounts and credit cards: it is assumed that the number of current accounts and credit cards held also has an impact on the creditworthiness index.

Obtain SCHUFA information once a year

In order to be able to estimate already before the application of a credit, like the own chances stand, it can be meaningful to catch up itself with the schufa a credit rating information. So you can also easily check your own creditworthiness once. A SCHUFA report can be obtained once a year free of charge. However, each additional information is associated with fees: for example, if you would like to receive another credit report online, this costs a one-time fee of 18.50 euros.

Fixed interest rate for all with conditions independent of creditworthiness

Creditworthiness-independent conditions apply to all customers whose creditworthiness does not reach a certain scoring threshold. In these cases, banks only check creditworthiness to find out whether the conditions for a loan approval are met. The interest rate is then the same for all customers. For customers whose creditworthiness reaches the limit, banks also determine the current loan interest rates, taking into account the credit rating. These are usually higher than the previously advertised interest rate, but here too, the higher a customer's creditworthiness, the better the conditions.