What does credit rating mean in the context of lending?

If you want to make a loan request, you have to prepare a number of documents beforehand. The banks want information on their financial situation, regular income, and type of employment.

This requires wage slips, pension notices, for self-employed annual accounts as well as business calculations and the account statements of a few months. Of course, information about personal circumstances, marital status, and place of residence must be provided.

In addition, the loan applicant agrees to the collection of information from credit bureaus. Of course, all this information and documents are not only used to identify the borrower as a contractual partner.

They are required to assess the creditworthiness, i.e. H. to be able to assess the creditworthiness in relation to the specific loan request.

What does creditworthiness mean?

What does creditworthiness mean?

Two questions are to be answered with creditworthiness or creditworthiness. Is the borrower objectively able to repay the loan of the desired size in accordance with the contract, taking into account his income and assets, but also his personal circumstances?

In this context, one speaks of objective or economic creditworthiness. The second question is, is the borrower reliable and willing to pay so that banks can be certain that the loan will be repaid?

Willingness to pay is referred to as personal creditworthiness or subjective creditworthiness.

The willingness to pay is determined by the use of credit bureaus. Banks almost always endeavor to do this, but other credit agencies can also be considered.

Most of them are used in addition. So creditworthiness and Credit Checker are by no means the same. The content of the Credit Checker information is only one component of the credit check.

Why is the credit rating checked?

Why is the credit rating checked?

Credit bureaus like Credit Checker are happy to point out that they collect data from consumers in order to protect them from over-indebtedness. The protection concept is a reason for every credit check. But it is by no means in the foreground.

The bank’s interest in protecting itself from loan defaults is essential. Without a credit check, credit banks would be exposed to an incalculable risk of loss.

In the worst case, bankruptcies could result. But banks would always have to set the interest rate high enough to offset unforeseen losses. The consequence for solvent consumers would be disproportionately high lending rates.

Credit checks when granting credit are therefore a prerequisite for a functioning credit market that is spared unnecessary risks.

That is why the legislature has made it mandatory to check personal and economic creditworthiness before each loan.

For Germany, this obligation arises, among other things, from Section 18 KWG. This regulation is supplemented by European guidelines.

According to the laws and guidelines, commercial lenders are obliged to collect the necessary data to determine both moments of creditworthiness and to classify each borrower into a rating system taking this data into account. How the credit banks make this classification and how they weight the individual creditworthiness criteria, however, is essentially up to them. The credit banks are given a relatively large degree of discretion.

Subjective credit rating: Credit Checker

The first step that banks take when checking their creditworthiness is to regularly request information from credit reporting agencies. The most popular is of course the Credit Checker.

Credit Checker provides information on two evaluation criteria, the credit score and whether there are any negative characteristics.

Credit Checker keeps a file for almost all consumers. The file contains neutral, positive and negative characteristics based on generally accessible information and information that Credit Checker receives from its contractual partners.

Here is a summary of the most important features:

Basic data and positive data

These data in themselves have no negative impact on creditworthiness. The emphasis is on “seen in isolation”.

In a certain combination, they can have a negative impact on the willingness to lend.

  • Personal data (name, address, place of birth)
  • Current accounts (applications for opening, opening an account, overdraft facilities and other framework loans, garnishment protection account).
  • Accounts in retail and mail order.
  • Credit inquiries (conditions inquiries).
  • Credit applications, applications for real estate loans, and also revolving credit cards.
  • Borrowed and real estate loans, all types of credit cards issued.
  • Inquiries, applications and taking out loans in connection with commercial and freelance work.
  • Guarantees.
  • Leasing and hire purchase including inquiries.
  • Mobile phone contracts with term.

Of course, these characteristics are only positive as long as all obligations are fulfilled within the scope of the contract.

In addition, too many contracts in one category can have a negative impact. Example: multiple credit cards, multiple checking accounts, some of which remain unused, a large number of credit requests.

negative characteristics

Improper fulfillment of commitments leads to negative Credit Checker entries. In detail:

  • Misuse of accounts and credit cards.
  • Canceled card accounts or current accounts in processing.
  • Termination of consumer loans because the borrower is late with at least two installments.
  • Broken checks due to insufficient funds.
  • Initiated collection and dunning procedures, dunning notices.
  • Claims that cannot be realized.
  • Undisputed claims that have been reminded but have not (yet) been paid.
  • Enforcement of legally established claims, enforcement measures.
  • Applied or opened consumer bankruptcy proceedings.
  • Affidavit and warrant.
  • Applied or opened consumer bankruptcy proceedings.

A distinction is made between soft negative features and hard negative Credit Checker entries. Hard negative characteristics preclude all lending.

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