Credit scoring: what does that mean?
What does the Schufa Score mean?
Banks and companies have a reasonable interest in having their loans repaid as agreed. At the same time, they also want to be able to inform the customer as soon as possible about a decision on lending. In order to reconcile both wishes, mathematical approaches have been developed, which are supposed to give an estimate of the likelihood of a loan default based on statistical methods. The individual calculation methods differ from company to company. In the end, however, a number always comes out: the so-called credit score. Depending on the scale used, this can vary. Basically, however, the higher the score, the lower the probability of default of a loan.
- 1 Internal and external credit scoring
- 1.1 How does Schufa determine the credit score?
- 2 What can one do to increase the credit score?
- 3 Which factors are bad for your own credit scoring?
- 4 What is the difference between credit score and credit rating?
- 4.1 Will my data be deleted at some point?
Internal and external credit scoring
The companies use a variety of data to assess the creditworthiness of a customer. These include, among other things, self-disclosure about income and expenditure. Added to this are the experience gained from business relationships in the past and publicly available documents such as entries in public debt directories. How these different factors are weighted varies according to the algorithm used. In any case, at the end of the process, a first internal score is created. Of course, this represents only a part of the business relations of the applicant. It is thus possible, for example, for a customer to repay one bank regularly and reliably, but more often to default on installment loans from companies.
To secure your own credit score, you can therefore call in an external score. This is usually determined by a credit agency and should also provide information on how likely a loan will be repaid. The best-known provider in the German market is the protection association for general credit protection – in short: SCHUFA. By merging the external and internal scores, the final assessment is created, so to speak. A low value does not necessarily lead to a rejection. It is also possible for the lender to offset the risk with higher interest rates. Incidentally, this applies not only for credit inquiries at the house bank or in a local bank branch, even if loans are compared online via platforms such as kredite-vergleich.de , the requested lenders initially secure and try the credit scoring of the potential borrower analyze.
How does Schufa determine the credit score?
The protection association for general credit protection is a private company that receives information from around 8,500 contract partners in Germany. These include banks, leasing companies, telecommunications providers and online retailers. When concluding a contract with these companies, the customer usually agrees to a Schufa clause. From then on, all relevant actions will be shared with the credit bureau. In practice, it is therefore relatively difficult to prevent data from being passed on to the protection community for general credit protection. Even those who pay their purchases always in advance and in cash, must expect that the credit agency knows where he opened his current account.
Finally, the protection community calculates a score from all the data collected and in turn shares it with its contractual partners. Ideally, these provide an overview of all business transactions of the customer. How exactly the credit score is calculated, however, is not publicly known. Only the state supervisory authorities and the responsible data protection officers gain insight into the exact algorithm. But everyone has the right once a year to receive a free data overview from the credit agency. As a rule, one can then imagine which entries have had a positive effect on the Schufa score and which ones rather negatively.
What can you do to increase the credit score?
A low credit score leads in the worst case to a rejection of a loan request, or at least to unnecessarily high costs. However, consumers can use certain behaviors to ensure that the score rises again in the long term. For example, the following measures are conducive to a positive assessment:
- Serve loans and payment obligations on time.
- Avoid unnecessary small loans and in case of doubt pay directly in cash.
- Resistance in financial matters. Those who remain loyal to their bank for a long time and do not change their place of residence too often are considered reliable.
- Use credit only in exceptional cases. This is intended for short-term overdrafts and should not be abused as a permanent loan.
- Cancel superfluous loans and credit cards.
Of course, improving one’s own credit score is a long-term project, but it may well be worthwhile. But it is important to start in time. Those who first look after their credit score when they need a loan are usually late. Conversely, if you pay your bills on time and always have a certain level of liquidity, you do not have to be afraid of the credit score. On the contrary: this then rather ensures a faster processing of the loan application and in the best case even for lower interest rates and a simplified use of credit.
Which factors are bad for your own credit scoring?
As different as the individual scoring procedures may be, in all cases, those who do not meet their payment obligations must expect a devaluation of the score. This applies not only to loan installments, but also, for example, to direct debits or longer-term contracts, to loans, loans and, of course, to instant loans. Of course, not every failed debit is reported immediately, but the risk should be avoided. In plain English: either provide for a cover of the account or avoid long contracts and direct debits if possible. The creative tapping of sources of money with the help of several credit cards or syndicated loans also leads in the long term to a devaluation of creditworthiness. All of these things have influence on themselves, of course.
More difficult is the so-called geoscoring. Because the credit reporting agencies in Germany are allowed to also use geographical information. Specifically, this means that who lives in an area in which it comes increasingly to bad credit scores, must also expect a devaluation – even if he himself has not come to debt. The companies assure that they only use this data in an emergency, if nothing else is available. However, since the actual algorithm is not published, this claim can not be verified. Frequent changes of place of residence also lead to a worse value in the context of geoscoring.
What is the difference between credit score and credit rating?
In everyday life, the two terms are often used interchangeably, but in fact they are different. By credit rating is meant the result of the verification of self-disclosure. So if you have a high income, few payment obligations and no current loans, you will get a positive assessment here. In a sense, this is the basis for determining the internal score. This is only part of the final credit score. Then there is the external score, which is determined by credit reporting agencies. This may well deviate from the initial assessment made.
Because, of course, people with high incomes can live above their circumstances, which then inevitably leads to financial difficulties. In the long term, this ensures a low credit score, although the self-report analysis actually looked very good. The assessment of customer creditworthiness is therefore only a first step in deciding on a loan. She also has something like a bouncer function. Loan applications, which already fall through the grid during the examination of self-disclosure, are only rarely examined in detail, but mostly rejected directly. Then a fundamentally high credit score does not really help.
Will my data be deleted at some point?
Negative entries that lead to a bad credit score, however, will not last forever. Anyone who had to pay for a payment at a young age would not be punished for life. Rather, an entry about non-contractual behavior is usually deleted after three years. However, if claims remain outstanding, the deadline will be extended to four years. Information about a loan received will also be deleted exactly three years after the payment of the last installment. Often times alone helps to improve the credit score – provided you do not worry for new negative entries.
However, one exception is undeniably false entries. These must be deleted immediately. It may therefore make sense to request an annual compilation of the collected data and to examine them. If it can then be proved that an entry does not correspond to the facts, it will be deleted. If there are disputes – for example, because crucial documents are no longer available – an arbitration board can also be called. The Ombudsman’s decision is then binding on the credit bureau. For citizens, the path to a decent court remains in the event of a negative outcome, which is usually associated with high costs and low chances of success.