Personal creditworthiness plays an important role when you want to apply for a loan. In addition, this is usually the decisive criterion for providers when it comes to a new cell phone contract, ordering on the Internet, or financing a new car. But what is actually behind it and what things should you pay attention to? Find out in this article!
What does creditworthiness mean?
The term creditworthiness originally comes from the Latin word “bonitas”, which can be translated as “goodness”, “quality” or “quality”. In the financial segment, creditworthiness is synonymous with the creditworthiness of a person or a company. The creditworthiness or creditworthiness of a borrower thus reflects the risk that the bank would take if it were to lend to the relevant borrower. A poor credit rating represents an increased risk and a very good credit rating represents a very low risk of default.
How is the credit rating assessed?
If you want to take out a loan, the lending bank will check your credit rating during the application process. In this way, the bank would like to ensure that you can also repay the desired loan amount. Credit checks are also carried out, for example, if you want to conclude a new mobile phone contract, finance a car or lease. The providers of other products and services would also like to check whether you will meet the payment obligations in the future.
Data on your creditworthiness are stored at so-called credit bureaus and requested in the event of a creditworthiness check.
The protection association for general credit protection, in short: Credit Bureau, is probably the best known and most used credit agency when it comes to assessing individual creditworthiness.
How is the credit rating influenced?
At Credit Bureau, creditworthiness is measured using a creditworthiness score. To do this, Credit Bureau stores data about you and your payment history. In particular, it is about information about:
- existing bank accounts and credit cards
- current cell phone contracts or other payment obligations
- outstanding loans and installments
This information is reported to Credit Bureau by the respective contractual partners. For example, if you conclude a cell phone contract, the provider reports this contract to Credit Bureau. Basically, this is not bad, quite the opposite: if you have a lot of positive entries at Credit Bureau, this shows that you have good creditworthiness and meet your payment obligations.
However, if you are no longer able to meet your payment obligations, the contract partner will notify Credit Bureau of a payment disturbance in the current contract. This can be the case, for example, if you can no longer pay the installments of a loan taken out. The reporting of a payment disturbance results in a negative entry at Credit Bureau, which worsens your credit rating.
Since Credit Bureau only collects and stores data from which your credit score is calculated, errors can easily creep into this data. For example, a loan that has long been repaid can still be registered as open. This can also happen if the bank failed to inform Credit Bureau about the repayment of the loan. In this case, your credit score could be worse than it should be, as a fully repaid loan is a positive feature and can improve the credit score. In this case, you should check that your data is correct and have it corrected if necessary. To do this, simply submit the decision regarding the complete repayment of the loan to Credit Bureau. By the way, to check the stored data, you have a legal right to free information about your stored data once a year.
When will the data be deleted from Credit Bureau?
Data entered will not be saved forever. As soon as a claim has been reported as settled, the deletion process usually begins. Different deletion rules apply to different entries. As a rule, entries are saved for three years. The following exceptions also apply:
- If the claims are not titled, they will be deleted immediately if they are settled within six weeks of entry.
- Amounts of less than 2,000 USD are also deleted immediately if the debt has been settled within six weeks of being entered in the register.
- Special regulations apply to minors. As soon as an entry has been reported as completed, it will be deleted immediately.
What factors still play a role in lending?
The credit check is an indispensable tool for banks to assess the default risk. In addition to the credit rating of the credit bureaus, banks also pay attention to other criteria in order to better assess the risk. Banks can determine the requirements for credit approval themselves, which is why they can vary from provider to provider. This essentially includes:
- The professional circumstances of the applicant
This includes questions such as:
- Are you employed or self-employed?
- How long have you been / have been with the current employer?
- How long has your business existed (for self-employed)?
- What is your income?
- The applicant’s financial situation
Some banks offer better conditions for customers with material possessions, which in case of doubt can serve as security for the loan. These include, for example:
- real estate
- Works of art or valuable antiques
- Securities / life insurance / savings
- High quality jewelry or precious metals like gold
- The economic situation of the applicant
When lending, it is crucial that you can repay the monthly installment on time. The key to this is what your budget bill looks like:
- What is the regular income (salary, rental income, profit from self-employment, etc.)?
- How much are the regular expenses (rent, electricity, telephone, insurance, other loans, etc.)
- Is the difference between income and expenses large enough to pay the monthly installment of the loan applied for?
- The personal circumstances of the applicant
In addition to the economic situation, the personal living conditions for a bank are also interesting. The following points are particularly important:
- What is your current marital status?
- Do you have children?
- How old are they?
- The social circumstances of the applicant
Even though it may sound unfair to some people, some banks also consider the following points when evaluating the risk of a loan:
- In which environment do you live (“problem area” or “flagship district”)?
- Have you moved often in the past few years?
Conclusion on creditworthiness
The credit rating indicates your creditworthiness. It is decisive for whether a bank grants a loan and on what terms. If you always meet your payment obligations, you usually have a good credit rating. If loans, rent or other payment obligations cannot be paid, a negative Credit Bureau entry is made. This lowers your credit rating, which can make it difficult or even impossible to take out new loans.