Credit check – what consumers need to know.

Requirements for the use of a loan are a statutory minimum age of 18 years, a permanent residence in Germany, a German bank account and regular income and a corresponding credit rating.

But what exactly does the term “credit rating” stand for? Why is a credit check performed before the loan is granted? And what does the credit bureau have to do with it? Answers to these questions are provided by our guide.

What does the term “credit rating” mean?

What does the term "credit rating" mean?

The creditworthiness of a borrower plays a crucial role in lending. The term credit rating describes the ability of the potential borrower to be able to and fully meet the payment obligations arising from the loan on time and in full.

Since lenders want to ensure that the borrower can fulfill their obligations before lending, a credit check is performed before the contract is concluded. To do this, borrowers need to give the lender insight into their financial situation and then have them rated. Credit checks are not just about taking out a loan. The solvency of the customer is also checked when concluding insurance policies, mobile phone contracts, leases or transactions with online retailers.

The result of this credit check is a so-called score value, which is stated in percentages or points. The higher the score, the higher the creditworthiness of the borrower. And the greater the likelihood that he will get a loan.

Many banks also offer loans with credit-based interest rates. This means that the better the creditworthiness of the bank customer, the better the conditions if he wants to take out a loan.

However, in our comparison of personal loans, you will also find some banks that offer loans with non-credit-standing interest rates. This way, borrowers know from the start what the costs are. These loans can be recognized by the word “fixed interest rate” below the interest rate.

Although the fixed interest rate is usually slightly above the best possible interest rate of the loans with credit-dependent conditions. For this, customers can not be sure when it comes to the credit-based interest rates whether they really have to receive this premium or not have to expect significantly higher interest rates.

Expiry of a credit check

Expiry of a credit check

Once the borrower has chosen a bank and a particular loan, the credit check begins on the application form. After the banker has determined the amount and duration of the loan, personal data and financial circumstances are requested.

The credit-worthy data includes:

  • Income of the borrower
  • Security of employment (officials are better rated than freelancers)
  • Marital status, number of dependent children
  • Residential situation (residential property is better rated as rent)
  • Existing financial obligations
  • Property / assets of the borrower
  • Depositable securities

In terms of income, wealth, property and collateral, the principle is: the more, the better. Of course, the more a borrower earns, the higher the likelihood that he will be able to repay a loan. Therefore, it is recommended for couples to apply for a loan together if both spouses are working.

Together, they can throw a much higher income in the credit check into the balance than one negotiate alone and thus better conditions.

Property (eg home ownership) and collateral (eg life insurance) serve as a pledge to the banks should defaults occur. For example, since a homeowner still has recoverable assets in the event of financial difficulties, his credit rating is better than that of a renter.

As a result, interest rates on mortgage loans are generally much cheaper than for commercial mortgages, as the bank has high-security property to finance. An overview of the current conditions offers our comparison of mortgage lenders.

On the other hand, children have a rather negative impact on the creditworthiness of the borrower. they simply cost money, and that sometimes unexpectedly. Even existing loans are at the expense of the credit rating and make it difficult to obtain another loan.

Many banks have developed in-house scoring systems that assess the creditworthiness of borrowers. The credit check is now fully automatic for most banks and only takes a few moments. This way, customers often find out after a few minutes, whether they can get a loan.

In addition, all German banks work together with the credit bureau. With this they get an information as it is ordered to the solvency and creditworthiness of the customer. Only after a successful credit check and credit bureau information will be decided on the award and terms of the loan.

Who or what is the credit bureau?

Who or what is the Schufa?

The credit bureau (protection association for general credit protection) Holding AG is Germany’s largest private credit agency. Their task is to provide partners with information on the creditworthiness of third parties. credit bureau’s database contains nearly 864 million individual data on 67.5 million natural persons and 5.3 million companies (as of 2018).

Who wants to take out a loan, can not help but, that the lending bank obtains information from the credit bureau. The following data of the borrower are stored in the database:

  • Contact details of the borrower (including name, age, address, moving behavior)
  • Type, subject and conditions of the respective business (inter alia loan agreements with duration and amount, opening of accounts, credit cards)
  • Different payment behavior
  • Misuse of accounts / credit cards
  • Information from public directories (including affidavits, opening of insolvency proceedings)
  • Inquiries (eg condition requests for bank loans)

The amount of the income and the account balance are not saved. All other information is not stored forever, but only for a specific time. Requests for financial products will be removed from the database after twelve months, and repaid loans after three years.

A negative credit bureau entry almost always means the end of the loan. Most banks deny customers a loan if the credit bureau score is insufficient. An exception are the providers of loans without credit bureau.

These offer forgiven their loans exclusively on the basis of their own credit check. In our comparison, you can see which providers are available for loans without credit bureau and which interest rates are currently common on the market.

Get credit bureau information

Get Schufa information

According to the Federal Data Protection Act, every person has the right to request information about the stored data. Once a year, your own data may be requested free of charge. Each additional inspection is subject to a charge.

credit bureau offers the opportunity to obtain information about its own credit rating via the meinecredit bureau.de portal. In addition, various, paid service packages are offered. The basic functions include automatic notifications by e-mail or SMS, should changes or queries be made by contractual partners of the credit bureau.

What does my score value mean at credit bureau?

credit bureau assigns you a score based on your data. This is between 0 percent and 100 percent and describes the probability that the loan will be repaid on schedule.

Characteristics of larger groups of people are also transferred to individuals. So it can happen that borrowers with a very low risk of default are considered to be worse off if they live in a socially depressed area – whose inhabitants are sometimes unable to repay bills.

The following table shows the individual risk groups and the respective score value assigned to them. As you can see, the risk of default is already elevated with a score of 94 percent.

Score value probability of default
greater 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

What to do about wrong credit bureau?

What to do about wrong Schufa?

Erroneous entries can have serious consequences, especially if borrowers need credit and they are unjustifiably not or significantly worse off. The most frequent source of errors are already repaid claims that were not deleted in time from the database.

The Federal Data Protection Act guarantees the right to correct incorrect data. Often enough a letter to “credit bureau, Holding AG, Consumer Service Center Hannover, PO Box 56 40, 30056 Hannover”, in which you draw attention to the erroneous entries.

In this case, credit bureau will review the complaint and then correct or update the data. If there are still issues after the data has been checked, you should contact the credit bureau Ombudsman or a lawyer.

What should I look for in the loan request?

What should I look for in the loan request?

First, make sure that you choose the right loan for your financing needs. As mentioned earlier in the text, for example, banks offer special mortgages or car loans.

Although these are earmarked, but cheaper than personal loans. This is because the property to be financed or the vehicle to be financed serves as collateral for the bank. This has a positive effect on the credit rating and ensures more favorable interest rates.

Familiar with us on board can also have a positive effect on the loan rate. If, for example, your spouse brings an income of their own or vouches for the repayment of the loan, this will have a positive effect on your credit rating and give you better conditions.

Also, be aware of the difference between condition request and loan request. The query of the conditions is anonymous and has only informative character for the borrower. The loan request, on the other hand, has an official and binding character.

With the loan request, the bank already carries out a credit check and collects credit bureau information. The loan request is stored in your credit bureau data for one year and can be viewed by other banks for ten days.So, if you ask several banks for credit inquiries to choose the cheapest deal, keep in mind: every request leaves a footprint in your credit bureau and worsens your credit bureau score. This makes it harder to get a loan on good terms!

To prevent this from happening, you should first use our credit comparisons, whether you need a personal loan, a home loan or a special loan. Enter different loan amounts and maturities to find the cheapest provider.

In addition, request non-binding offers and make anonymous condition inquiries to gain a comprehensive overview of the current market situation. Once you have found the lender of your choice, start the loan request.

You can find more information about exciting topics from the world of credit in our advisory section

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