Creditworthiness – you should know
The term credit is derived from the Latin word “bonitas” (German: “good condition, excellence”). It is used as a synonym for the creditworthiness of individuals, companies or states. The credit rating (creditworthiness) describes the ability of a debtor (borrower) to fully meet his future payment obligations on time and want.
Thus, the creditworthiness includes both the economic ability to repay and the personal willingness to pay of the respective debtor. Within the framework of the material (economic) creditworthiness, it is forecasted to what extent the debtor is economically capable of being able to meet the actual financial obligations. Personal creditworthiness, on the other hand, affects individual reliability and willingness to pay.
From which elements does the creditworthiness of a person consist?
At the heart of the credit check is the analysis of economic creditworthiness. It is directly dependent on the current and future predictable income and assets of the respective person.
In this context, income statements, salary statements, land register extracts relating to real estate as well as account and securities account statements of securities are used as evidence in particular. Of immediate relevance are the type and amount of debts and the previous payment behavior as a debtor. In this regard, information is often obtained from credit bureaus such as the credit bureau.
On the one hand, this information contains information on breach of contract and contractual conduct in the case of legal transactions with credit institutions, telecommunications companies and mail order companies, provided that these data have been forwarded by the respective companies to the credit reference agency.
On the other hand, legal events such as court orders, executions and insolvency proceedings are also covered by the credit bureau. The personal credit rating includes criteria such as lifestyle and job security as well as professional and technical qualifications of natural persons.
In which areas does credit rating play a role?
Creditworthiness is very important in many legal transactions in the business and private sectors. It is particularly important in all transactions, which are closed on credit. This is always the case when companies provide their services in advance before being paid by the debtor.
Since these companies want to hedge the risk of default, they value the creditworthiness of their customers. This mainly applies to banks such as banks and savings banks in their function as lenders to conventional bank loans. In the same way, this also applies to those companies that provide goods or services to their customers for a fee or grant them supplier credits.
The credit rating thus does not only play a role in conventional credit transactions with banks. It is also an important parameter in the issue of securities. It may also be relevant when concluding a lease on a home in the private sector. Depending on what type of transaction it is, the credit rating of the debtor, borrower or issuer.
The creditworthiness is checked not only before the conclusion of the individual transaction, but also during the entire term in order to be able to recognize any changes in the credit risk in a timely manner.
What are the consequences of having a good credit rating?
The creditworthiness relates to the predicted probability with which the borrower (debtor) services the agreed payments correctly. There is no single credit rating with general validity. Rather, the credit rating is characterized by a large number of different levels, which vary depending on the specific individual case and are expressed in terms of the scores.
The better it is, the more likely the fulfillment of the contract will be. The default risk is therefore rated as low in this case. As a result, persons with good credit ratings are particularly attractive as contract partners in all business areas. Thanks to the low del credere risk, they are able to obtain loans from banks and savings banks on favorable terms.
Credit institutions grant lower interest rates because their own risk is rather low in this case. In addition, other companies are willing to close deals on credit if the debtor is considered creditworthy. The option of installment purchases is as open as the payment method on account.
What are the consequences of a bad credit rating?
By the same token, the creditworthiness measures the risk with which a payment default will occur. A bad credit rating means a high default risk. It leads to significant restrictions in business dealings and contracting. Credit institutions and companies regularly review the creditworthiness of their clients before entering into a contractual relationship. The business relationships either do not materialize or only on very unattractive terms for the borrower.
Above all, this primarily concerns the area of credit business in the narrower sense. With bad credit, it is almost impossible to get a conventional loan from banks or savings banks. The loan applications are therefore usually ajar with insufficient creditworthiness. However, if the credit institution grants the loan, this is regularly associated with a high risk premium on the borrower. Negative consequences are also evident in daily money transactions. People with bad credit are usually denied the benefits of a credit card as well as keeping a checking account.
The restrictions are also expressed in general business transactions outside the banking sector. Companies do not provide installment purchases and exclude “payment by invoice”. Instead, they insist on prepayment. This also applies to the telephone service providers who refuse to conclude a classic mobile phone contract in the event of a high default risk. Overall, people with bad credit ratings face many negative consequences in everyday economic life.