If you want to take out a loan, you must undergo a credit check. What is behind it, how it works and how you can improve your credit rating, we tell you in this article.
What is a credit check?
The credit rating describes the creditworthiness of a person or a company. This means to what extent the person is able and willing to meet a payment obligation. Credit assessment is composed of two elements in the lending process:
- The applicant's economic situation, i.e., the ratio of income to expenses.
- The person's creditworthiness, i.e. their previous payment history.
A credit check does not only take place when granting loans. Other examples in which companies perform a credit check are:
- The conclusion of mobile phone contracts
- The conclusion of rental contracts
- The conclusion of installment purchases
- The purchase on account.
Banks rely on both internal and external score values to assess creditworthiness. Internal score values are calculated from internal company specifications and data, for example, the company's previous experience with the applicant. External score values are obtained from credit agencies.
Why is a credit check performed?
The check of creditworthiness serves the security of the provider. For the lending bank, granting a loan always means a certain risk. With the credit check, the bank wants to minimize this risk. By checking the creditworthiness, the lender can see before the contract is signed 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. This can avoid payment defaults and thus save a lot of trouble and additional costs.
Who carries out a credit check?
The credit score performed by companies with which you wish to enter into a contract, if this is necessary for the contractual relationship. As a rule, such a credit check only takes a few seconds. For this purpose, the companies cooperate with corresponding credit agencies, for example Schufa or Infoscore.
You yourself can also obtain a credit report on your person. The credit agencies offer fee-based services for this purpose, however, according to Art. 15 DSGVO also entitles you to one free self-disclosure per year. The paid offers are usually sent to you by mail within a few days. The free variants often take a little longer.
What creditworthiness data is stored?
In addition to personal data such as your name, address and dates of birth, the credit agencies also store data on your previous payment history. This means that the contractual partners report the data on contractual relationships with you to the credit agency. The credit agency determines your personal credit score from the sum of this data.
For example, if you conclude a mobile phone contract, this conclusion of the contract is reported to Schufa. As long as you pay it regularly and properly, this contract will have a positive effect on your credit score. If payment difficulties occur, this is also reported to Schufa and has a negative effect on your credit score.
This is how your credit score is determined
The credit score is intended to represent the probability of repayment of future payment obligations. The better the score, the more likely it is that the person will continue to meet your financial obligations in the future. The individual credit agencies use different methods for calculating the score value, but they are similar in their basic features.
Basically, different criteria are used to determine the credit score. These include above all:
- Previous payment history when concluding contracts
- Existing debts and credits
- Repaid loans and installment payments.
Before the conclusion of a credit agreement, the individual banks have, in addition to the credit score, internal criteria for assessing the creditworthiness of an applicant. This includes, 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 affect your credit score accordingly.
Characteristics that have a positive influence
In addition to the negative features that most people are afraid of in a credit check, there are also features that can improve an individual's credit score. This includes above all:
- Taking out a loan
- The opening of an account
- To repay a loan in full
- Applying for credit cards
- The termination of mobile communications contracts
- The conclusion of an installment sale.
Different deletion periods apply to positive entries. While entries on loans and credit cards, for example, remain positive for three years after they have been repaid in full, information on current accounts or mobile phone contracts is deleted from the database as soon as the contract is terminated.
