Individual credit standing, also known as credit standing, acts as the decisive indicator as to whether the applicant, as a borrower, will be able to make interest and principal payments in accordance with the terms of the contract and in compliance with the necessary deadlines. It may be both a private and an institutional applicant in this context. The creditworthiness is increasingly linked to the personal circumstances of life and current as well as future expected income and financial circumstances of the potential borrower.
With the creditworthiness, various financial organizations classify the creditworthiness of states, companies and consumers on the basis of statistically relevant data. The objective of this assessment is to reduce default risks that arise in many different areas.
The creditworthiness of a customer has a significant importance in the granting of loans . Both private and corporate clients receive a loan only after a thorough review and subsequent confirmation of their credit rating. This applies to all types of loans , such as long-term real estate and investment loans , as well as short-term mini-loans, consumer or current-account loans . Likewise, commercial and private tenants usually have to prove their creditworthiness before concluding a real estate contract. The creditworthiness of a state is also subject to regular review. The result determines the creditworthiness of the country. Companies analyze the creditworthiness of their business partners in terms of supply and service relationships.
Banks determine the creditworthiness of private customers on the basis of personal data and information about their regular incoming and outgoing payments. Personal information includes gender and age, occupation and duration of employment, residence, marital status and number of children . Investigating the financial situation of the loan customer, banks use information about income to collect earnings in the form of labor, rent and other income . As expenditure, the credit check covers rental payments and ancillary costs as well as any maintenance payments and installments for existing loans . In addition, credit institutions include the number of existing accounts and credit cards as well as existing real estate ownership in the credit check. Soft criteria are the personal characteristics such as the occupation performed , while all information on the revenue and expenditure situation as well as a personal bankruptcy are hard criteria. If this data shows that the customer does not have sufficient liquidity to service a loan, he will not receive a loan. The same applies to consumers who have undergone a private insolvency procedure in the past.
The classification of companies’ creditworthiness is based on publicly available information, as in the commercial register of annual accounts. In addition, industry affiliation, company size and company history influence the credit rating. In the context of lending or the conclusion of other contracts, such as delivery or purchase commitments, analysts use other criteria. This includes collection data, plan calculations, liquidity overviews and other financial information. In the case of corporate customers , information about payment difficulties or a judicial dunning procedure gives rise to a negative credit rating. The level of gross domestic product and the main export and import figures together with the national debt proves to be decisive for the creditworthiness of a country. The credit rating is always determined by a multi-year comparison and the comparison with the data of comparable countries.
In addition to the award decision, the amount of interest required for the loans also depends on the creditworthiness: the better this is, the lower the interest rate due to the low risk premium. For countries, their credit rating determines what interest the issuer of government bonds must pay.
For the calculation of creditworthiness, best practices are available. They are suitable both for the individual consideration of economic subjects as well as for their comparison.
In order to determine the creditworthiness, the implementation of standardized valuation procedures takes place. The systems developed by financial experts ask for different criteria and weight them according to their importance for creditworthiness. As a rule, so-called “scoring methods” are used, which are based on statistical methods. In addition to the credit-relevant data collected, a scoring model also includes the information provided by the credit bureaus. As a result, this type of credit rating from the addition of each scored rating feature determines a scoring value in the form of an absolute number or a percentage. It indicates within a defined range how high the creditworthiness of the examined subject is.
Individuals who need information about the creditworthiness of a consumer can ask them to voluntarily provide self-assessment. It is also possible to ask the person concerned to obtain relevant information from a credit bureau. As a rule, the evaluation of the information provided in this way takes place on an individual basis and without systematic methodology. In contrast, companies, especially in mass business, are proceeding according to plan. They require extensive self-disclosure prior to entering into a contractual relationship, which must be supported by supporting documents. In addition, they have clients sign forms that contain a so-called “Good Lender clause”. This constitutes an authorization to transfer the personal data to a credit reference agency and to obtain from it information about payment history in the past.