In the financial industry, credit reports are a common method to verify the creditworthiness of natural persons and companies. The credit report provides information about their economic position. Credit rating is thus related to personal and economic creditworthiness, which is forecast on the basis of past and current data. The purpose of the credit report is to protect companies from deteriorating payment behaviour. Therefore the evaluation of creditworthiness of private persons and companies as well as disclosure in terms of a credit report are long since part of daily business. Justified negative entries cannot easily be deleted from credit rating databases. Whereas if the negative evaluation is unlawful, private persons and companies can take legal action. Credit reports are provided by credit rating agencies. Credit agencies are private companies and are financed by credit-lending businesses. Their business purpose is to protect their contractual partners against credit defaults. They provide information about the past credit transactions by the natural or legal person in question, the respective income situation, existing debts and current loans, as well as expenses and possible asset components.
Companies are examined to a much greater extent. Initially, the credit report is free-of-charge for general details that can be obtained from the bank or through a credit agency. Anyone who requires more information on the credit report will refer to annual financial statements with information about the equity ratio, available cash flow in terms of profit, turnover or potential losses. The annual financial statements also provide information about overall business planning, investment policy and quality of management. But there are also other sources credit reports on companies may be obtained from. These include credit reference agencies that provide economic information about companies. Depending on the level of risk to be hedged, various information may be obtained as part of the credit report. The credit report may impart very basic information, for example, the company's history, business purpose and associated industry, subsidiaries, shareholding and real estate. In order to assess the economic situation within a credit report, details about the overall financial health of the company, its payment history and negative features, business figures and balance sheets are also required.
For personally liable directors and partners, freelancers and small businesses, "score values" are calculated to rate the creditworthiness and relay this in form of a credit report. A score value provides information regarding the probability of the person concerned being able to pay their invoice. Score values, sometimes referred to as "conduct grades" in German, are part of the assessment of the concerned person's solvency and willingness to pay. Credit reports are provided by credit rating agencies.
As a matter of principle, business dealings with higher risk should be vetted much stricter and more comprehensively than those with lower risk. In any case, the credit report should be obtained prior to rendering the service. For less creditworthy business partners or customers, the terms underlying the business transaction can be adapted according to the result of the credit report. The respective creditor is free to decide which credit criteria are used and how they are weighted. The credit ratings associated with a credit report are done with the first granting of a loan, but also continuously during the term of the granted loan. Credit ratings based on credit criteria result in a rating grade, with the purpose of determining the current credit risk of a respective debtor at different times. In an evaluation points are being awarded, which provides information on creditworthiness as well as the division into rating classes. Positive entries in a credit report not only confirm good creditworthiness, but also makes for potential contract partners to be open for credit applications. The consequences of negative entries also have a negative effect on credit applications, so that the risk of a possible insolvency (colloquial: bankruptcy) in case of a payment shortage is much higher.