In everyday life today it is often important to be creditworthy, and usually it is also a crucial prerequisite for being able to actively participate in business life. When concluding agreements that create future liabilities, one factor is whether the applicant is creditworthy or not.
This applies, for example, to taking out loans or advances, using credit card credit, and concluding leasing or telecommunications contracts. In all these cases the contracting partner advances performance and thereby fulfills their part of the contract.
They assume that the other side — the borrower, the credit card user or the mobile phone customer — will in turn fulfill the contract and make the agreed payment on time and in full.
Whether someone is creditworthy is also called creditworthiness and is divided into the personal and the economic aspect. It concerns the willingness and the ability to repay the incurred liability. It helps the lender little if the debtor is very willing to repay but, for economic reasons, is not able to do so.
A person is worthy of a loan when all personal prerequisites demonstrate that they will not be overwhelmed by repaying it. Banks and savings banks protect themselves before granting loans by requesting and evaluating a variety of data from the applicant.
Without income there can be no expenses, and certainly no repayment of liabilities. Income must on the one hand be secure and on the other hand reach a certain level. The lender aims to keep its default risk as low as possible.
If the borrower no longer fulfills their contract, the credit institution will use all legal options to obtain the loan amount plus contractual interest.
The path to this can lead via a dunning notice, an enforceable court judgment up to subsequent enforcement measures such as garnishment of wages, salary or household items. A prerequisite for this is that there is garnishable income. Regular monthly income must be above the garnishment exemption threshold.
Anyone whose monthly net income does not reach this threshold has little chance of obtaining a loan if they are not creditworthy. Loan terms usually run for several years. For the lender this means a correspondingly long credit default risk.
In its credit check it therefore also assesses how secure the current income situation is and will remain in the future. Depending on the type and amount of the loan, a permanent and contractually secured employment relationship is expected. Civil servants with lifetime tenure, for example, are considered highly creditworthy from this perspective because they cannot be dismissed.
Classification of Creditworthiness
Unfortunately there are no uniform criteria for assessing creditworthiness, since each borrower's economic and personal circumstances must be considered individually. However, it has become common practice to denote the different levels of creditworthiness as scores or ratings and to express creditworthiness in these terms.
These range from "very good creditworthiness" to "just acceptable creditworthiness."
A borrower who has a good monthly income that easily covers their expenses generally has very good creditworthiness, provided there are no negative Schufa entries.
Monthly income must cover ongoing monthly expenses and be high enough to also allow the planned liability, such as a loan or a car lease. Everyday life usually does not change because of this new liability; all previous expenses continue unchanged. They must be financed and remain financeable. Against this overall background, an overall assessment is made.
Good creditworthiness
To find out how good the applicant's creditworthiness is, the lender primarily checks their economic circumstances. This means the loan applicant must provide information about their monthly income, expenses, any other existing liabilities and their employment relationship.
In addition, the credit institution will have questions about the prevailing living conditions. The bank or savings bank is entitled to this. Depending on the size of the family, income and expenses are calculated. It is also relevant whether one rents or owns property.
From all these small details the credit institution forms an overall value that indicates good or poor creditworthiness.
Insight into the Schufa report: creditworthy or not?
One basis for this is the self-disclosure, which must be completed truthfully. Depending on the credit institution, individual details are checked, among other things, by accessing the Schufa, the database of the Schutzgemeinschaft für allgemeine Kreditsicherung, for which the applicant's written consent is required. The entries there show the type, amount and term of the liabilities.
The Schufa score, as a calculated value, indicates the quality of creditworthiness in percentage terms. The closer the score value is to one hundred percent, the more creditworthy a person is considered from this perspective. But this is — as is repeatedly emphasized — only one aspect of creditworthiness.
When creditworthiness concerns reliability, a statement from a landlord about the timeliness and regularity of rent payments can also be revealing. If no payment irregularities have occurred during a many-year tenancy, this permits positive conclusions about the reliability and accuracy of the loan applicant.
The lender looks for every possible way and opportunity to properly assess the other party. This is never possible with 100% certainty, so a residual risk of default always remains.
Check your own creditworthiness
It can happen that a loan applicant is rejected by the credit institution because they are allegedly not creditworthy. The credit institution usually refers to Schufa information that is supposed to prove this.
If as a customer you cannot understand why this should be the case, it may be because Schufa still has old or incorrect data stored that negatively affect creditworthiness in such a case.
For this reason it is always advisable to obtain your own Schufa report before applying. This is free once a year and uncovers any possible errors that you can then have corrected before applying for the loan. (->) get your own Schufa report for free
Certificate of conduct, reputation and good appearance
Apart from calculated credit values such as the Schufa score, the assessment of whether someone is creditworthy is ultimately a human-to-human judgement. It depends on personal discernment. Someone who scores with a neat appearance and a confident demeanor makes a correspondingly good impression on their counterpart.
A certificate of conduct with no entries is proof that one has had no conflicts with the law. Often a good reputation can also help underline that one is creditworthy and reinforce the lender's opinion. These are the so-called soft criteria, as opposed to the hard criteria like numbers, data and facts.
Every loan seeker must be aware that they are borrowing money directly or indirectly. As a result they become a debtor and are contractually and legally obliged to settle their debt. The assessment of whether someone is creditworthy is ultimately a decision based largely on existing facts and the applicant's past behavior.