Credit and creditworthiness check – what’s behind it??

Anyone wishing to take out a loan must undergo a credit check. What is behind it, how it works and how you can improve your credit rating, we tell you in this article.

What is a credit check?

Creditworthiness describes the creditworthiness of a person or company. This means the extent to which the person is able and willing to meet a payment obligation. The credit check is composed of two elements when granting credit:

  1. The applicant's economic situation, i.E. The ratio of income to expenditure.
  2. The person-dependent creditworthiness, i.E. The previous payment history.

A credit check does not only take place when granting loans. Other examples in which companies perform a credit check are:

  • The conclusion of mobile phone contracts
  • The conclusion of leases
  • The conclusion of installment purchases
  • The purchase on account.

To assess creditworthiness, banks rely on both internal and external score values. Internal score values are calculated from internal company specifications and data, for example the company's previous experience with the applicant. External score values are obtained from credit agencies.

Why is a credit check carried out?

The check of the creditworthiness serves the security of the provider. For the lending bank, the granting of a loan always means a certain risk. With the credit check, the bank wants to minimize this risk. By checking the creditworthiness, the lender can tell before the contract is signed whether the borrower will be able to meet his or her payment obligations in the future.

For the borrower, the credit check in advance also means security against the risk of excessive indebtedness. This can avoid payment defaults and thus save a lot of hassle and additional costs.

Who carries out a credit check?

The credit check is performed by companies with which you want to conclude a contract, if it is necessary for the contractual relationship. As a rule, such a credit check takes only a few seconds. For this purpose, companies cooperate with appropriate credit agencies, such as schufa or infoscore.

You yourself can also obtain a credit report on your person. The credit agencies offer fee-based services for this purpose, but according to art. 15 DSGVO also entitled to one free self-disclosure per year. You will usually receive the offers, which are subject to a fee, by mail within a few days. The free variants often take a little longer.

What data is stored about your creditworthiness?

In addition to your personal data, such as name, address and date of birth, the credit agencies also store data on your previous payment history. This means that the contractual partners report to the credit agency the data on contractual relationships with you. The credit agency uses the sum of this data to determine your personal credit score.

For example, if you conclude a mobile phone contract, this conclusion of the contract is reported to schufa. As long as you pay this regularly and properly, this contract will have a positive effect on your credit score. If there are payment difficulties, this will also be reported to schufa and will have a negative effect on your credit score.

This is how your credit score is determined

The creditworthiness score is intended to represent the probability of repayment of future payment obligations. The better the score, the more likely it is that the person will continue to meet your financial obligations in the future. The individual credit agencies use different methods for calculating the score value, but they are similar in their basic features.

In principle, different criteria are used to determine the credit score. These include above all:

  • Previous payment history when concluding contracts
  • Existing debts and credits
  • Repaid loans and installment payments.

Before entering into a loan agreement, individual banks have internal criteria for evaluating an applicant's creditworthiness in addition to the credit score. These include, for example:

  • The individual income-expenditure situation
  • Existing assets
  • Family situation of the applicant.

The credit agencies distinguish between positive and negative characteristics, which can influence the credit score accordingly.

Characteristics that have a positive impact

In addition to the negative features that most people are afraid of in a credit check, there are also features that can improve an individual's credit score. These include, above all:

  • Taking out a loan
  • The opening of an account
  • Repaying a loan in full
  • The application for credit cards
  • The conclusion of mobile phone contracts
  • The conclusion of an installment purchase.

Different deletion periods apply to the positive entries. While entries on loans and credit cards, for example, remain as positive features for a further three years after they have been repaid in full, information on current accounts or mobile communications contracts is deleted from the database as soon as the contract is terminated.

Features that have a negative impact

Negative entries are information that lowers your own creditworthiness. This is information that has arisen as a result of improper contractual behavior, for example, non-payment of financial obligations. A distinction is made between:

  • Soft negative features, for example:
    • Ongoing debt collection proceedings
    • Failure to settle an outstanding debt despite a reminder
    • Misuse of an account despite prohibition of use.
    • Judicial default summons
    • Legally valid enforcement notice
    • Execution of a foreclosure.
    • Execution of insolvency proceedings
    • Residual debt discharge in the course of insolvency proceedings
    • Submission of an affidavit or. Disclosure of assets
    • Threat of imprisonment due to refusal to submit an affidavit or. Insurance.

    While medium and soft negative features are deleted again after three years, extended deletion periods apply to hard negative features. For example, insolvency proceedings are not cancelled until six years after they have ended, and residual debt discharge from insolvency proceedings is only granted after ten years.

    What influence does the credit check have?

    A credit check is carried out before any loan is granted. The result of this credit check decides not only whether the loan is granted in principle or not. It also has an influence on the credit conditions. The following applies:

    The better your credit rating, the more favorable interest rates you will be offered!

    This is how you can improve your credit rating

    To get financing with favorable conditions, a good credit score is important. There are a number of ways in which you can improve your own creditworthiness. These include:

    • Get a credit check yourself at regular intervals. How to check the information stored about you. You can have incorrect entries deleted and thus improve your credit score.
    • Always meet your payment obligations. If you do not pay your bills, negative entries can arise, which worsen your credit score.
    • If you move frequently, that can also negatively affect your credit score. Therefore, avoid frequent changes of residence.
    • You can cancel unused credit cards and accounts. Too many unused accounts and credit cards can lower your credit score.
    • Increase your overdraft facility. A high overdraft facility is a sign of confidence on the part of the bank. This confidence has a positive effect on your creditworthiness and thus on your credit score.
    • Do not overdraw your overdraft facility. A high overdraft facility is good for your credit rating, but if you use up your overdraft facility too often or overdraw it, this can have a negative effect on your credit rating.

    Conclusion on the credit rating

    The credit check provides information about a person's creditworthiness. This tells you how likely it is that future payment obligations, such as repaying a loan, will be met. To be able to correct incorrect entries, you should regularly obtain a credit report on your person. If you also follow our tips for improving your credit rating, you can increase your chances of getting a loan and good conditions. For example, you can finance your christmas presents, buy new furniture, afford a motorcycle or continue your education at a master school.