Before each loan, banks check both components of creditworthiness: the performance and reliability of their customers. Efficiency means having sufficient income and assets to ensure that the desired loan is properly repaid. It will be checked by the bank itself based on the information in the credit request and the attached documents. This check not only covers the income situation in the narrower sense, but also factors that can have an indirect impact on the material possibilities of the borrower. This includes the civil status, the number of children, possible maintenance obligations, the age of the applicant, his profession and his living environment.
The reliability is determined by information from credit bureaus
The bank tries to determine the likelihood that its customer will properly fulfill the loan agreement. Negative entries about irregularities in the performance of a contract in the past very often mean the end of every credit request. If the file of the business information is clean, it depends on the score, the calculation of which every credit agency treats as much as possible as a business secret.
How to improve creditworthiness and score: tips
- Before you borrow, preferably once a year, get the self-disclosure you are entitled to free of charge under the law. The credit bureaus have hidden the application form for the free data overview according to paragraph 34 of the Federal Data Protection Act on their websites. Click here to have your credit rating checked online free of charge by providing your own information: Credit Record (the most important credit agency), Arvato Infoscore, Bürgel, Deltavista and Creditreform.
- Correct any errors in the file. Make sure that negative entries have been deleted after completion and that deletion deadlines are met. Positive entries such as properly serviced loans should not be missing. Personal data and addresses must be complete.
- Try to clean up negative entries and have them deleted if necessary. For example, if you pay an open but not yet titled invoice amount of less than $ 1,000, a Credit Record entry must be deleted.
- Try to implement the advice to improve the base score in Chapter 2.
- Keep your liabilities clear. A loan makes a better impression than multiple loans. If necessary, reschedule.
- Avoid buying in installments or dealer loans with zero interest. Both financing instruments are entered like normal loans.
- Compare loan terms before each loan, but make sure that your credit inquiries are forwarded to Credit Record or other credit agencies as condition requests and never as loan requests.
- The credit line of your overdraft facility should be as high as possible, but use the overdraft facility as little as possible, ideally not at all. If the bank grants you a high overdraft, which you hardly use, this is a positive credit rating.
- In a loan request, you should really state all income, not just your regular monthly wages. Additional income from capital assets, leasing and leasing or special services such as holiday pay, Christmas bonus, performance bonuses and commissions can have a positive impact on the bank’s creditworthiness check.
Special advice to improve the base score
It may sound strange, but make sure that the credit bureaus can store data about you. Of course, it must be positive data. Having no data at all at credit bureaus leads to negative scores. The easiest way to do this is to open a checking account. Young consumers should do this as early as possible. Clean up the financial products you use. Cancel credit cards that you don’t necessarily need.
The same applies to checking accounts
Change the financial service providers (banks, credit card issuers) as rarely as possible. Too often changing the current account is said to have a negative impact on the base score. Avoid revolving credit cards where partial payments can be made on the debit balance. Partial payments should have a negative impact on the score. Pay all bills and loan commitments on time. Avoid multiple reminders in any case.
After the second reminder, the creditor can report the delay to Credit Record if 4 weeks have passed since the first reminder. Sometimes one reads on the Internet that vehicle leasing should have a positive effect on the score because the conclusion of the leasing contract indicates a positive credit rating by the lessor.
Score determination, the dark secret of credit bureaus
Whether all of this advice and how exactly it affects the various score values can only be suspected, but cannot be confirmed with certainty. The credit bureaus keep the determination of the individual scores and which data with which weighting are taken into account largely secret. Credit Record, for example, is particularly transparent. Consumer advocates, on the other hand, see it differently.
They complain of a lack of transparency. The case law has given the credit agencies right. The only requirement is that the facts used to determine the various scores have to be relevant for the creditworthiness, i.e. for the reliability of the consumers.
Which data are included in the score?
Credit agencies can of course only consider data when determining their score that they actually have. First of all, personal data are saved: last name, first name, date of birth, gender, place of birth, last name, previous addresses, current address. The list of addresses allows conclusions to be drawn about the move behavior. Transactions by subject and contractual terms: credit contracts, leasing contracts, credit cards, current accounts, telecommunications accounts, customer accounts in retail and mail order.
Payment behavior not in accordance with the contract: bad debts, reminders, titled claims, settlement of claims. Abuses of accounts and credit cards after blocking. Entries in public registers: affidavit, warrant, bankruptcy proceedings, rejection or termination of insolvency proceedings due to lack of assets. There is no information on the income and asset situation of consumers.
What does scoring mean?
Scoring is a forecasting process based on statistical surveys. Consumers are divided into forecasting models based on the data collected, and then a specific consumer is assigned to a specific model. Example (simplified, not relevant in practice): The credit agency used statistics to determine that the probability of default on loans is 10% if the borrower is male and over 50 years old, lives in a city and has more than one bank account. If a certain borrower fulfills these requirements, he receives the score that was determined for the abstract consumer group.
Without relying on specific personal circumstances, the credit agency assumes that the credit default probability is 10%. Different credit agencies determine different score values using different methods. For example, Infoscore specializes in the assessment of risks in mass transactions such as dispatching goods without prepayment against invoice or dealer credit. This special score primarily includes personal data and address data (geoscoring).
Credit Record base score and bank score
Credit Record, the most important credit agency for consumers, determines different score values. In addition to the base score, there are various industry scores. Because Credit Record assumes that consumer groups behave differently depending on the type of obligations.
For example, an important building loan will be served properly rather than a cell phone contract.
The table for the Credit Record base score:
|Score||Probability of failure|
|Higher than 97.5%||Very low risk|
|95% – 97.5%||Low to manageable risk|
|90% – 95%||Satisfactory to increased risk|
|80% – 90%||Significantly increased to high risk|
|50% – 80%||Very high risk|
|Less than 50%||Very critical risk|
The industry score for banks
|Industry score for banks when there are no open negative characteristics|
|Rating level||score||Rating ratio|
|A||9,863 – 9,999||0.80%|
|B||9,772 – 9,862||1.64%|
|D||9,623 – 9,708||3.10%|
|E||9,495 – 9,622||4.38%|
|F||9,282 – 9,494||6.21%|
|G||8,774 – 9,281||9.50%|
|H||8,006 – 8,773||16.74%|
|I.||7,187 – 8,005||25.97%|
|K||6,391 – 7,186||32.56%|
|L||4.928 – 6.390||41.77%|
|M||1 – 4,927||60.45%|
|Industry score for banks when there are open negative characteristics|
|Rating level||score||Risk ratio|
|N||4,112 – 9,999||48.47%|
|O||1.107 – 4.111||77.57%|
|P||1 – 1.106||96.08%|
The score values reflect the status of October 2017. The bank score is called up as part of the credit check before the loan is granted. For many banks, the creditworthiness is at rating level D, sometimes a credit at rating level H is granted. How can I improve my credit rating?