Anyone wishing to take out a loan must undergo a credit check. In this article we will tell you what is behind it, how it works and how you can improve your credit rating.
What is a credit check?
The creditworthiness describes the creditworthiness of a person or a company. This means the extent to which the person is able and willing to meet a payment obligation. The credit check consists of two elements when lending:
- The economic situation of the applicant, i.e. the relationship between income and expenditure.
- The personal creditworthiness, i.e. the previous payment behavior.
A credit check does not only take place when granting loans. Other examples in which companies perform a credit check:
- The conclusion of mobile phone contracts
- The conclusion of leases
- The completion of installment purchases
- Purchase on account.
To assess creditworthiness, banks rely on both internal and external score values. Internal score values are calculated from internal company specifications and data, for example the company’s previous experience with the applicant. External credit scores are obtained from credit bureaus.
Why is a credit check carried out?
The creditworthiness check serves the security of the provider. For the lending bank, granting a loan always involves a certain risk. The bank wants to minimize this risk with the credit check. Based on the creditworthiness check, the lender recognizes before the contract is concluded whether the borrower will meet his payment obligations in the future.
For the borrower, the credit check in advance also means security against the risk of excessive debt. In this way, payment defaults can be avoided and a lot of trouble and additional costs saved.
Who carries out a credit check?
The credit check is carried out by companies with which you would like to conclude a contract if this is necessary for the contractual relationship. As a rule, such a credit check only takes a few seconds. To this end, the companies cooperate with corresponding credit bureaus, for example the Credit Bureau or Infoscore.
You too can obtain credit information on yourself. The credit agencies offer chargeable offers for this purpose, however, according to Art. 15 GDPR you are also entitled to free self-disclosure per year. You will usually receive the paid offers by post within a few days. The free versions often take a little longer.
Which data is saved on creditworthiness?
The credit bureaus save data about your person, such as name, address and date of birth, as well as data about your previous payment behavior. This means that the contractual partners of the credit agency report the data on contractual relationships with you. The credit agency determines your personal credit score from the sum of these data.
For example, if you conclude a mobile phone contract, this contract conclusion will be reported to Credit Bureau. As long as you regularly pay it properly, this contract has a positive effect on your credit rating. If there are payment difficulties, this is also reported to Credit Bureau and has a negative impact on your credit rating.
This is how your credit score is determined
The credit score should represent the probability of repayment of future payment obligations. The better the value, the more likely it is that the person concerned will continue to meet their financial obligations in the future. The individual credit bureaus use different methods to calculate the score value, but they are similar in their basic features.
Basically, different criteria are used to determine the credit rating. Above all, these include:
- Previous payment behavior when concluding contracts
- Existing debts and loans
- Loans and installments paid.
Before concluding a credit agreement, the individual banks have internal criteria for assessing the creditworthiness of an applicant in addition to the credit rating. These include, for example:
- The individual income-expenditure situation
- Existing assets
- Family situation of the applicant.
The credit bureaus distinguish between positive and negative characteristics, which can influence the credit rating accordingly.
Features that have a positive impact
In addition to the negative features that most people fear when performing a credit check, there are also features that can improve the individual credit score. Above all, these include:
- Taking out a loan
- The opening of an account
- The full repayment of a loan
- Applying for credit cards
- The conclusion of mobile phone contracts
- The conclusion of a hire purchase.
Different deletion periods apply to the positive entries. For example, while entries on credit and credit cards remain a positive feature three more years after their full repayment, information on current accounts or mobile phone contracts is deleted from the database as soon as the contract is terminated.
Features that have a negative impact
Negative entries are information that reduce your own creditworthiness. It is information that has arisen from improper contractual behavior, such as the non-payment of financial obligations. A distinction is made between:
- Soft negative features, for example:
- Ongoing collection procedures
- Non-settlement of an open claim despite a reminder
- Abuse of an account despite a ban on use.
- Medium negative characteristics, for example:
- Judicial order for payment
- Legally enforcement order
- Execution of an execution.
- Hard negative features, for example:
- Insolvency proceedings
- Debt relief in the course of insolvency proceedings
- Submission of an affidavit or property information
- Threatened imprisonment for refusing to take an affidavit or insurance.
While medium and soft negative features are deleted again after three years, longer deletion periods apply to hard negative features. Insolvency proceedings are only deleted six years after termination, and the exemption from residual debts from insolvency proceedings is only deleted after ten years.
What influence does the credit check have?
A credit check is carried out before each loan. The result of this credit check not only decides whether the loan is granted in principle or not. It also has an impact on loan terms. The following applies:
The better your credit rating , the cheaper interest rates are offered to you!
This is how you can improve your credit rating
In order to get financing with favorable conditions, a good credit score is important. There are several ways in which you can improve your own credit rating. This includes:
- Get a credit report yourself at regular intervals. In this way you can check the information stored about you. You can have incorrect entries deleted and thus improve your credit rating.
- Always meet your payment obligations. If you do not pay your bills, negative entries can arise which worsen your credit rating.
- If you move frequently, this can also have a negative impact on your credit rating. Avoid frequent changes of residence.
- You can cancel unused credit cards and accounts. Too many unused accounts and credit cards can lower your credit score.
- Increase your overdraft facility. A high overdraft facility is a sign of trust on the part of the bank. This trust has a positive effect on your creditworthiness and thus on your credit rating.
- Do not overdraw your overdraft facility. A high overdraft facility is good for your creditworthiness, if you overextend your overdraft facility too often or overdraw it, this can have a negative impact on your creditworthiness.
Conclusion on the credit check
The credit check provides information about a person’s creditworthiness. This tells you how likely it is that future payment obligations, such as repaying a loan, will be met. In order to correct incorrect entries, you should regularly obtain credit information on yourself. If you also follow our tips for improving your credit rating, you can increase your chances of getting a loan and good conditions. For example, you can finance your Christmas gifts, buy new furniture, afford a motorcycle or continue your education at the master school.