Aspects of creditworthiness

In everyday life today it is often important to be creditworthy, and it is usually also an essential prerequisite for participating actively in commercial life. When entering into contracts that create future liabilities, it matters, among other things, whether the applicant is creditworthy or not.

This applies, for example, to taking out loans or credit, using credit card credit, and when concluding leasing or telecommunications contracts. In all these cases the contracting partner makes an advance payment and thus fulfills its part of the contract.

They now assume that the other side — i.e. 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 or not is also called credit standing and can be divided into the personal and the economic aspects. It is the willingness and the ability to meet the assumed obligation. It helps the lender little if the debtor wants to repay very much but is economically unable to do so.

One is worthy of a loan when all personal prerequisites show that one is not overwhelmed by its repayment. Banks and savings banks secure themselves before granting credit by asking the applicant for a wide range of data and evaluating it.

Income situation: Is a borrower creditworthy?

Without income no expenses are possible, and certainly not the repayment of obligations. Income must on the one hand be secure and on the other hand reach a certain level. The lender seeks to keep the risk of loan default as low as possible.

If the borrower no longer fulfills their contract, the credit institution will use all legal means to obtain the loan amount plus contractual interest.

The route to this leads via a dunning notice, an enforceable court judgment up to subsequent enforcement measures such as garnishment of wages, salary or household items. The prerequisite for this is that there is garnishable income. Regular monthly income must be above the garnishment exemption threshold.

Those whose monthly net income does not reach this threshold have 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 the lender therefore also assesses how secure the currently available 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 extremely creditworthy from this perspective because they cannot be dismissed.

Classification of creditworthiness

Unfortunately there are no uniform criteria for assessing creditworthiness, as the economic and personal circumstances of each borrower must be considered individually. However, it has become common to express the different levels of creditworthiness as scores or ratings.

These range from "very good creditworthiness or credit standing" to "barely acceptable creditworthiness or credit standing."

A borrower who has a good monthly income that easily covers their expenses, and who has no negative entries with Schufa, generally has very good creditworthiness.

Monthly income must cover ongoing monthly expenses and also be high enough to make the planned liability, such as a loan or a car lease, unproblematic. Daily 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 a kind of balance sheet is drawn up.

Good creditworthiness

To find out how good an applicant's creditworthiness is, their economic circumstances are primarily checked. This means the applicant must provide information about their monthly income, expenses, any existing liabilities and their employment situation.

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 expenditures are calculated. It is also relevant whether one rents or owns a home.

From all these small details the credit institution forms an overall value that provides information about good or poor creditworthiness.

Insight into the Schufa report: creditworthy or not?

A basis for this is the self-disclosure, which must be completed truthfully. Depending on the credit institution, individual entries may be checked. Among other things, this can be done by inspecting 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 obligations.

The Schufa score, as a calculated value, shows the quality of credit standing as a percentage. The closer the score is to one hundred percent, the more creditworthy one is from this perspective. But, as is repeatedly emphasized, this is only one aspect of creditworthiness. If reliability is concerned, a landlord’s statement about the punctuality and regularity of rent payments can also be revealing. If no payment irregularities have occurred over many years of tenancy, this can be taken as a positive indication of the borrower's reliability and accuracy.

The lender looks for all possible ways and opportunities to properly assess the other party. This is never one hundred percent possible, so a residual risk of loan default always remains.

Check your own creditworthiness

It can happen that an applicant is rejected by a credit institution because they are allegedly not creditworthy. The credit institution usually refers to the Schufa entries to justify this.

If a customer cannot understand why this should be the case, it could be because Schufa still holds old or incorrect data 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 potential errors that can be corrected before submitting the loan application.

Certificate of conduct, reputation and good appearance

Aside from calculated credit values such as the Schufa score, the assessment of whether someone is creditworthy is also a person-to-person judgement. It depends on personal insight. Someone who presents a well-groomed appearance and a confident manner makes a correspondingly good impression on their interlocutor.

A certificate of conduct with no entries is proof of having had no conflicts with the law to date. And often a good reputation can also help to underline that one is creditworthy and to reinforce the lender’s opinion. These are the so-called soft criteria, in contrast to the hard criteria such as numbers, data and facts.

Every loan seeker must be aware that they are borrowing money directly or indirectly. This makes them a debtor and 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 behaviour.