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What does credit score mean?

Everything good at your end? Why your credit score is important when you want to get a loan

You must meet various requirements before you can take out a loan. In addition to a regular income (which guarantees you’ll be able to repay the loan), you must have a good credit score, which determines whether you are creditworthy or not. Have you had payment issues in the recent past? Have you been sent payment reminders? Both these factors play a role in deciding your credit score, as do interruptions in loan re-payments or defaults.

Countries, companies and private individuals are all reviewed and assessed

No matter whether you’re after consumer credit, car financing or a mortgage so you can buy your own home, you’re treated just the same as companies or countries wanting to borrow someone else’s money on the capital markets. However, their creditworthiness is judged by international ratings agencies such as S&P, Moody’s or Fitch, whereas in the case of a private loan, the finance institutions involved evaluate the applicant.

In general, information from the Verein zur Führung einer Zentralstelle für Kreditinformationen (ZEK), the association for credit information, and the Informationsstelle für Konsumkredit (IKO), the association for consumer credit, is also taken into account in your score. Data is often collected from private credit agencies, too. As far as this goes, the better your credit score, the easier it will be for you, as a private individual, to receive a loan. And that’s not all: the better your credit score, the better the conditions attached to the loan as well.

Get the numbers in your favour: be careful about submitting applications to multiple banks

When you request a credit offer from a financial services provider, they will always notify ZEK of your enquiry. The credit score information provided by ZEK covers all the applications you have submitted to banks and other credit providers in the recent past. So, be careful! If you’ve requested offers from several banks with the hope of comparing them against each other, this can give the impression that multiple competitors have already turned you down.

To avoid this, don’t start by requesting an actual offer: just ask about their current lending conditions. You can use the website of the bank in question to find out about interest, terms and other conditions – or you can simply use bob Finance’s credit calculator.

Tips to boost your credit score: plan in advance

Everyone forgets to pay a bill once in a while – and then receives a payment reminder as a result. It’s not the end of the world, as long as it only happens once. If it happens more frequently, it can create issues when applying for credit up to one or two years later. No matter whether you’re applying for a small loan or looking to fund your new build, the mechanisms that influence the conditions of the loan, and whether you’ll get one at all, are always the same.

Even if you’re not looking for a construction loan at the moment, say, because you’re still a few years away from creating your own home, there’s plenty you can be doing right now to ensure that your credit score looks healthy. Avoid:

  • Accumulating credit
  • Unpaid bills
  • Irregular loan repayments
  • Too many credit cards