What is credit rating?
Definition: The ability and willingness of a client to meet its future payment obligations in full and on time.
The question “What is credit rating?” Is closely related to lending. Banks only grant credit to customers if they can prove sufficient creditworthiness. Also, mail order companies and online shops require a credit check before they ship goods against invoice.
Basically, the credit rating is the creditworthiness or solvency. A bank or a mail-order company checks, before starting a business relationship, whether the new customer is creditworthy. The credit check includes various criteria that banks use to check repayment security. Suppliers inform themselves in the context of a credit check on the likelihood that customers will pay their bill within the payment period.
The most important criteria for assessing creditworthiness are personal and economic creditworthiness. Current circumstances and payment history from the past are included in the audit. Here, the credit standards of banks and suppliers differ. Mail order companies mainly consider the payment behavior.
They do not ask about current income and regular payment obligations. On the other hand, these criteria are particularly important for a bank before it awards a loan. Banks and suppliers carry out the check of the credit rating according to different criteria.
The credit check
Banks that grant loans over a period of several years check the creditworthiness using business-statistical methods. These lead to an individual credit rating by systematic examination of the creditworthiness criteria. The credit check is on the one hand a secure basis for the credit decision for banks.
On the other hand, banks are also obliged by the Banking Act to regular credit checks. Therefore, when you apply for a loan, the bank will require you to provide up-to-date proof of income. At the same time, you are required to provide information about your regular payment obligations and to prove this under certain circumstances.
As part of the credit check, the bank determines whether the difference between income and expenses for the regular payment of a credit installment is sufficient. It also takes into account your living expenses and any assets that can serve as collateral. In order to determine your payment history in the past, the bank solicits information from credit bureaus.
The information includes information about loans, bank details, customer accounts at mail order companies, online shops and mobile phone contracts. Because suppliers can not claim proof of income for each order, they focus their credit check on the information they receive from credit bureaus.
Impact of credit rating
The question “What is creditworthiness?” Can therefore be answered with the economic repayment ability of borrowers and the solvency of customers. After the credit check, a credit rating is based on a rating or a score. Bank ratings make banks dependent on their credit rating. In addition, the credit rating can also influence the level of the interest rate.
A higher credit risk may result in a higher interest rate. Suppliers will only carry out a delivery on account if the credit check results in a positive result. If this is not the case, dealers usually deliver their goods against cash on delivery or prepayment.