Credit rating is a value
The credit rating is a value that tells whether a debtor can repay borrowed money or not. For banks, credit check is very important in order to assess who wants to borrow money. The creditworthiness of the applicant helps the bank to assess the size of the default risk. To determine the credit rating, many different criteria were included in the calculation. Banks use the help of credit bureaus for this purpose. Credit bureau is the largest credit agency in Germany and has a significant influence on the creditworthiness of companies and persons in Germany with its credit rating. Depending on the credit rating, banks decide at which interest rate a loan will be granted, or whether the loan will be granted at all.
The credit rating can be queried not only for private persons, but also for companies. Even countries are checked for creditworthiness, this is done via rating agencies.
- Instrument for lenders to assess creditworthiness
- Is issued by credit bureaus
- Is calculated from many information like old loans
- Accurate weighting of factors unknown
- Own creditworthiness can be queried online
Creditworthiness in companies
For companies with a weak credit rating, the credit rating is strengthened and reviewed in detail. The bank ultimately only agrees when the credit check is completed. In the foreground are the following factors:
- Company industry
- Balance sheets of the company
- Previous payment history
- Current financial position
Creditworthiness of a natural person
If the creditworthiness of a natural person is checked, two essential aspects play a role. It examines the personal creditworthiness, it is about the willingness to pay and the reliability of the borrower. In addition, the economic creditworthiness is checked.
Credit check with different factors
Each bank has the option of choosing which factors should be included in the rating when assessing creditworthiness. At least, however, information on previous loans, debt and revenue must be assessed. For companies at least equity, cash flow and debt situation must be clarified.
Which criteria do the banks use?
No one knows exactly what factors the credit bureaus use and how they are weighted. However, the following information will definitely be noticed:
- Residence: Problem districts have a negative effect
- Duration of employment. If the employer often changes, it has a negative effect.
- Is the borrower permanently employed?
- Monthly income and fixed monthly expenses
- Are there already loans in progress and are they serviced reliably?
What effect does the credit rating have?
Nobody lends money to strangers without informing about this person. Banks act the same way. The focus of the bank is a smooth repayment of the loans granted. The credit rating helps banks assess how likely the smooth repayment of loan installments will be to applicants. If the credit rating is good, the credit is given at good interest rates; if the credit rating is worse, you have to offset the increased risk with higher interest rates.
Which credit bureaus are there and where do you get their information from?
The three most important credit bureaus in Germany are Credit bureau, Creditreform and Bürgel. These credit bureaus have contracts with banks, lenders, mobile companies, etc. and collect information about their customers’ payment arrangements.
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