What does creditworthiness mean?
According to a general definition, creditworthiness means whether and how solvent a customer, a company or a state is. Those who are creditworthy will very likely meet their payment obligations reliably and in accordance with the contract.
Credit institutions, companies, but also people who take a permanent economic risk (e.g. landlords) check the creditworthiness of their business partners in order to protect themselves from default. As a rule, special credit protection institutions, so-called credit bureaus, carry out such a credit check. To do this, they collect and save various data about personal living conditions, income and assets and the payment behavior of consumers in the past. They then use special algorithms to determine a credit rating. The best-known value is the Credit Bureau score.
When is my credit rating checked?
A classic case is the loan request from the bank. Here, a credit check with a positive result is the prerequisite for obtaining the financing.
All companies and individuals may also check their creditworthiness before starting a business relationship, as long as there is a legitimate interest, which regulates § 29 of the Federal Data Protection Act (BDSG). It varies, up to what amount, for example, landlords accept the risk of default and from when they prefer to test their creditworthiness in advance.
Below we list business relationships for you that are likely to require a credit check:
- Borrowing from the bank
- Conclusion of a cell phone, internet, gas or electricity contract etc.
- Conclusion of a private or commercial lease
- Conclusion of a leasing contract
- Purchase of goods in installments or on invoice (e.g. online shopping)
The creditworthiness is sometimes also checked during an ongoing contract, for example with installment loans. Here, banks can regularly test during the term of the contract whether the borrower is still creditworthy. Otherwise this would be a reason for the bank to terminate.
What are the consequences of high or low creditworthiness?
On the one hand, creditworthiness depends on whether you get a contract or a loan and, on the other hand, how good or bad the conditions are. Because the higher your creditworthiness, the more desirable you are as a customer. A low default risk, for example, is rewarded by banks with low lending rates.
Conversely, if you are not considered creditworthy, it will be difficult to get a loan or contract at all. Because for the other side it is then questionable whether you can really meet your payment obligations. Companies or credit institutions either do not take the default risk at all or they can pay dearly for it with high interest rates.
Am I creditworthy? How to find out!
According to Article 15 GDPR, every citizen has the right to receive free information about his creditworthiness once a year. To do this, you need to contact a credit protection institution. The best known is Credit Bureau Holding AG. Others are Creditreform Boniversum and Crif Bürgel. On their websites you will find the online application for credit information!
In our article on Credit Bureau self-disclosure, we explain how you can obtain your free Credit Bureau information.
7 tips: How can I improve my creditworthiness?
Your creditworthiness decides on the lending and the associated conditions. For this reason, we recommend that you regularly check your creditworthiness and, if necessary, improve your creditworthiness with appropriate measures. In the following, we will show you how you can do this using 7 effective tips.
Check creditworthiness: Check your Credit Bureau score regularly!
Every fourth credit report is statistically incorrect! The cause is usually outdated or simply incorrect data, which illegally worsens the credit rating and makes you no longer appear creditworthy. We therefore advise you to exercise your right to an annual free self-assessment, for example at Credit Bureau. As a contradiction, a letter to the credit agency with the request to delete the wrong or outdated negative data is sufficient.
Remain creditworthy: Pay all bills on time!
If you don’t want to risk your creditworthiness lightly, you should always pay your bills promptly. Companies do not have to report deferred payments to Credit Bureau. Don’t take the risk at all! Credit Bureau itself advises paying bills on time and reminders immediately, not to exceed credit lines and always repay debts in full. If payment difficulties do arise, it is best to immediately seek an open discussion with the creditor. Agreeing on deferral or payment in installments does not solve the problem straight away, but it can prevent a negative entry.
Keep the number of your accounts and cards clear!
The credit rating decreases with the number of accounts that you have with many different banks. You should therefore close accounts that you do not need. The same applies to unused credit cards. Here too, one or two credit cards are proof of trustworthiness. However, several suggest payment problems in the Credit Bureau logic. Incidentally, the Credit Bureau evaluates negatively that they have no account at all!
Creditworthy thanks to overdraft facility: Set up an overdraft facility, but do not touch it!
As a rule, Credit Bureau values a generous overdraft facility as proof that the bank has confidence in you. Even if you do not need the overdraft facility, it will help you to improve your creditworthiness. Therefore, always choose the maximum discount rate, but do not touch it if possible because of the extremely high interest rates.
Creditworthiness despite credit inquiries: be careful when searching for financing!
The creditworthiness often drops surprisingly as soon as you are interested in a loan and start comparative inquiries from various banks. While consumers only want to find the cheapest offer, Credit Bureau suspects that banks will reject your loan requests. That makes your score sink. When making comparative offers, you should therefore always make sure that these are only “credit condition requests”. We already took this setting into account in our installment loan comparison.
Creditworthy despite the move: don’t change banks and domicile too often!
Changing the bank or the place of residence too often can lead the Credit Bureau algorithm to believe that you are working on concealing your identity. If possible, it is better to stay at the house bank longer than possible, instead of changing the bank every time you move.
Creditworthiness and 0% financing: stay away from supposed bargains!
What many do not know: The 0% financing of goods that is often offered by retail is considered a normal loan. If you have completed several 0% financing of this type, your credit rating will decrease! So think carefully about what you can pay in cash straight away and whether the supposed bargain is really worth it.
How is the credit rating calculated and by whom?
Banks and corporations evaluate your creditworthiness based on several factors. This includes data on personal living conditions and data on income and solvency in general.
These factors affect creditworthiness
The assessment of your creditworthiness depends on personal and material factors, which form an overall picture. The following data are used:
- Gender, age, place of residence
- Marital status, number of children
- Occupation, duration of employment
Financial situation data:
- Amount of work income and other income (e.g. rental income)
- Amount of expenses (including rent, additional costs, possibly maintenance payments, loans)
- Number of existing accounts and loans
- Property (real estate)
- current or previous personal bankruptcy, dunning procedures, collection incidents
Creditworthiness: How Credit Bureau & Co work!
Special credit insurance institutions commissioned with this, of which Credit Bureau is the largest and best known, check whether you are creditworthy. These collect both positive data on contractually paid installments and invoices as well as negative data on defaults, bankruptcy applications or entries in debtor lists.
For this purpose, Credit Bureau works with around 9,500 companies, including telephone and mobile phone groups, banks and savings banks, companies in brick-and-mortar and online retailing, and also energy providers.
In the creditworthiness check, Credit Bureau uses algorithms to create the so-called credit score using algorithms. This value describes the probability of a default. How it is calculated, however, remains the trade secret of the respective credit agency.