What is a creditworthiness index (credit rating)?

The creditworthiness index is used to assess the creditworthiness of individuals or companies. It is calculated on the basis of various factors and is intended to provide a forecast of how likely a natural or legal person is to repay a loan on time and to the full amount. This is to provide a potential contracting partner with an exact idea of possible risks before concluding a contract. As a result, the creditworthiness index or score plays an important role in active risk management. Moreover, the creditworthiness index enables a company to take a sound decision on whether and at which conditions it wishes to establish a business relationship with the person assessed.


Factors considered in the calculation of the creditworthiness index

Various factors and weights play a role for the creditworthiness index - depending on who calculates it. Different service providers and credit agencies offer a creditworthiness index, which they calculate based on their own methods and data. Moreover, for some business models, the factors are weighted differently. Therefore, a given individual's creditworthiness index for a bank loan is usually not the same as for the conclusion of an insurance.

In the case of companies, equity, liquidity and payment discipline are of particular interest in calculating the creditworthiness index. In the case of private individuals, a meaningful creditworthiness index first and foremost needs to be based on comprehensive information on the person's income and expenses. In applying for a bank loan, the customers have to prove this on the basis of proof of income and tax assessments. Moreover, loan liabilities and the payment discipline so far also play a role. Credit agencies collect information on this through companies reporting to them under a contract. Negative characteristics, in particular, have an impact on the creditworthiness index. This includes entries in the record of debtors at the respective local court, enforcement orders or judicial warrants to obtain a statement on the debtor's financial situation.

Moreover, statistical values also play a role in credit scoring. This can include both the debtor's residential situation and his/her age.

Calculation of the creditworthiness index

The data and information available to the credit agency are converted into numerical values and weighted using a scoring procedure. This procedure is based on a mathematical model, and it results in the creditworthiness index: a numerical value along a scale. Usually, a higher creditworthiness index corresponds to a low likelihood of default and should, therefore, be aimed at. Accordingly, a full score means that it is very unlikely that this person might default on his/her obligations. In contrast to this, a low value means that a transaction with this customer might involve high risks.

Aim of the creditworthiness index (credit rating)

The creditworthiness index is designed to identify business relationships involving risks early on and, where necessary, to avoid them. Credit transactions and their risks do not only concern banks and financial institutions - every company that performs in advance and is only paid later also runs the risk of a credit default. This can concern a telecommunications company that is only paid after it has provided a mobile phone and after its mobile phone network has been used. Moreover, it can also concern a mail-order company whose invoice the customer pays after he/she has received the goods. Such day-to-day credit transactions entitle companies to obtain information about their customers' creditworthiness.

Consequences of a creditworthiness index which is low

A low creditworthiness index means that the person concerned has a low credit rating and is not creditworthy or only has limited creditworthiness. If you have a low rating, you might have to face negative consequences: Your overdraft facility might be terminated and, under certain circumstances, you might not be able to open a bank account. Moreover, you might not be able to conclude rental, mobile phone or leasing agreements. In addition, loans can be subject to a higher interest because the bank justifiably wants to cover the risk of a loan default.

So, if you show poor payment discipline and have perhaps even received an enforcement order, you have to be aware that the business world will know of this. If you have doubts in this respect, you can request your current creditworthiness index from arvato Financial Solutions (of infoscore Consumer Data GmbH). The legislator grants every consumer the option of obtaining a self-report. This informs you of the data saved regarding you and of the creditworthiness index that might be transmitted to inquiring companies. In accordance with the Federal Data Protection Act (BDSG), one self-report per year is provided free.