Credit Rating

1. What does "credit rating" mean

The credit rating refers to a person’s borrowing capacity as well as their creditworthiness. While borrowing capacity answers whether they can repay a loan, creditworthiness is the probability that a loan will be repaid.

2. Importance of the credit rating

Lenders require an assessment and classification of their credit risk – i.e. the probability of a credit default. Statements about this can be made based on a borrower's credit rating.

Thus, the credit rating plays an important role in the granting of loans (regardless whether it is a personal loan, a mortgage or a business loan). But it is also relevant for credit cards, mobile phone contracts, tenancy agreements, or when shopping online. In general, it can be said that the credit rating is checked for services and transactions for which no advance payment is made.

3. Determining the credit rating with a credit check

The credit rating of a borrower is determined as part of a credit check. To assess the credit rating, various personal data is collected and consolidated with statistical models. The determined value leads to a grade or a credit score.

Depending on the needs of the creditor, but also on the type of borrower, different criteria with different weightings may be of importance. However, each creditor decides what is considered and with what priority. Credit scores can also be determined by rating agencies and provided to creditors for a fee.

Although information on how exactly the credit score is determined is rarely public, it can be assumed that the following data is relevant, depending on the type of borrower.

For individuals

  • Information on previous credit settlements

  • Income situation (e.g. earnings, employer, job security)

  • Expense situation (e.g. rent, loan repayments)

  • Asset situation (e.g. home ownership)

  • Debt situation (e.g. loans, taken over liabilities)

For companies

  • Legal form

  • Equity ratio

  • Available cash flow

  • Profit and loss situation

  • Market segment outlook

  • Financial planning

  • Asset and debt situation

Extensive information that serves as a basis for credit checks can be obtained from credit agencies. These are privately operated companies that provide business-relevant data about applicants to their business partners. In Switzerland, CRIF AG, Creditreform and Intrum are most notable in this context.

Furthermore, the IKO (Informationsstelle für Konsumkredit) was founded in the field of consumer credits. Relevant information on personal loans, leasing contracts and, under certain circumstances, credit or customer cards is deposited there. This information is also considered in the credit check.

4. The impact of the credit score

When granting loans, the determined score has a direct impact on the credit decision. In addition, the score affects the conditions of a loan, especially the interest rate. In case of low credit ratings, some providers only allow the granting of a loan together with the conclusion of a residual debt insurance.

The credit rating can also have an impact on online shopping. Here, a low score can lead to goods only being delivered against cash on delivery or payment in advance.

5. Checking one's credit report

The IKO offers the possibility to request a report of all the data they store about oneself for free. Credit reports can likewise be requested from private credit agencies to view entries that influence one's own creditworthiness. Not all reports include a credit score. They might just list the factors determining the score.