Credit rating - What you need to know about creditworthiness

Credit rating is the assessment of a person or company with regard to their ability and willingness to pay. This means that the higher a person's credit rating, the better their reputation of being able to pay their accounts on time. In this regard, we also use the term creditworthiness.

For businesses, it is important to be able to estimate the credit rating of a future or current business partner, especially in anonymous distance selling like on the internet. The contract partner wants to know: how high is the probability that I will receive my money? We also speak of the probability of default. The lower this is, the higher the credit rating. For this purpose, there are various methods of credit assessment in the business world. These procedures are based on business theories and mathematical-statistical values. An assessment of this kind can take place for different reasons. The classic case is a bank loan, but other companies such as car dealers, construction companies or mail-order businesses also want to know the credit rating of potential customers.

Credit assessment via banks

If a private person requests a loan from a bank, their credit rating will be reviewed. The credit institution is required to do this. It must also regularly check the financial circumstances of its borrowers during the term of their loan. The information required for this is proof of income, personal details about occupation, address, property as well as a budget plan. This shows whether you are able to pay the monthly instalments with your family income. The personal assessment by the banking advisor can also play a role. Banks usually obtain information from credit agencies. The evaluation of thecredit rating has an impact on the borrowing rate. Broadly speaking, this formula applies: good credit rating equals low interest rate, and vice versa.

Criteria of a credit assessment

In practice, usually the following criteria are used to determine credit rating: previous payment history, income situation, spending situation, asset situation, debt situation and matrimonial property status. Generally every creditor is free to decide on the establishment and weighting of the individual credit rating criteria. You can differentiate between positive features or basic details of negative features. Within the negative features, hard and soft criteria differ. Hard criteria include compulsory enforcements, insolvency proceedings or asset disclosure statements (formerly: affidavits). These must be conclusive. Soft negative criteria are statements such as an application for a default notice, legal proceedings or out-of-court dunning. The transmission of negative features is subject to the strict requirements of the German Federal Data Protection Act (§28a para. 1 BDSG).

Credit scoring

One common method is credit scoring. It is customary for most banks. Various criteria such as net income, occupation, assets etc. are automatically evaluated and weighted. This then gives a credit score. Automated credit scoring is quick and easy, however, it does not take personal criteria into account. Most credit agencies apply their own methods of credit scoring.

Credit agencies

In practice, credit agencies play a major role in the assessment of credit rating. As service providers, they store data and offer their expertise for a fee. From the past payment history, they forecast the future payment behaviour of a person (scoring). There are other credit agencies besides Schufa, including companies like infoscore Consumer Data GmbH, an Arvato Financial Solutions company, Creditreform, Bürgel und Dun & Bradstreet. On the one hand, credit agencies obtain their information from public data of official and semi-official bodies. This is, for example, how insolvencies are publicised and can be viewed in Germany. There are also self-disclosures from persons or companies. On the other hand, credit agencies use databases with information on the payment behaviour of customers of affiliated companies. Furthermore, many work closely with collection agencies.

Credit check and data protection

A credit check is subject to data protection. Therefore it is only permitted if there is a "legitimate interest". The Federal Data Protection Act defines exactly what this means. A legitimate interest according to § 29 Federal Data Protection Act is e.g. if a company despatches goods on credit or want to conclude a service or work contract that involves economic risk. This also applies to ongoing business relations that are associated with permanent economic risk. (Advance payments must be made.)

Credit checks are often criticised. Many people are under the impression that the criteria and weightings are subjective. The opposite is the case: credit information is objectively verifiable and is weighted based on statistical analysis.

Credit rating is the assessment of a person or company with regard to their ability and willingness to pay. This means that the higher a person's credit rating, the better their reputation of being able to pay their accounts on time. In German we also use the term 'creditworthiness'.

For companies, it is important to be able to estimate the credit rating of a future or current business partner. The contract partner wants to know: how high is the probability that I will receive my money? We also speak of the probability of default. The lower this is, the higher the credit rating. For this purpose, there are various methods of credit assessment in the business world. These procedures are based on business theories and mathematical-statistical values. An assessment of this kind can take place for various reasons. The classic case is the bank loan. However, other companies such as car dealers, construction companies or mail-order businesses also want to know about the credit rating of potential customers.