You have certainly come across the term “ creditworthiness ”, at least if you have applied for a loan at the bank. Creditworthiness, or the assumed ability to repay a loan, is an essential part of the credit application approval process with a bank. What exactly does it mean and how does the bank collect this information?
What is credit risk?
By granting a loan, the bank appreciates the deposited funds, but at the same time it exposes itself to a certain risk, which is called credit risk. In order to prevent a receivable from becoming recoverable, the Bank seeks to defend and hedge against credit risk losses.
Elimination of credit risk
One way to hedge against credit risk is to try to eliminate this risk. Every bank wants to be solvent and stable, which is impossible without this step. In simple terms, this means providing money only to those applicants who meet the set criteria and are sufficiently likely to repay the loan.
What affects the applicant’s creditworthiness
For each loan applicant, the bank determines the creditworthiness, which is the expected ability to repay the loan. Lower creditworthiness means higher credit risk and this needs to be compensated somehow. According to the result, the bank will determine the interest rate.
The more creditworthy a client is, the lower the interest he can get, and vice versa. The bank assesses the applicant’s income and expenses during the creditworthiness process, and some of its personal data are also important.
Revenues and expenses
The Bank determines such permanent income from clients that is expected to last in the future. Employees are usually required to work for an indefinite period and at the time of applying for a loan should not be in the probationary period. What income does the applicant have to have?
Every situation is individual and in general you can’t really say it. It depends on the type of loan, collateral, maturity, repayment of other expenses, number of dependent children.
Regular expenses are also important. These include, for example, rent, insurance and repayment of other loans. The Bank deducts the subsistence minimum, which is individual for each applicant, from the documented income. It increases with the number of persons living in the same household and with the number of dependent children.
What personal data do clients assess?
- Age and gender
- Marital status, number of children
- Educational attainment
Basically, the older a person is, the lower their educational attainment, the worse rated profession and the more children, the lower the chances of getting a low-interest loan.
For the determination of creditworthiness, however, these are certainly not all data considered. The bank also maps your payment history and credit history. It uses data from credit registers, where both current and paid liabilities are recorded. There are three registers in the Czech Republic: COLUSE, the Non-banking Client Information Register and the Banking Information Client Register. If you have had a problem repaying in the past or have been late in paying a lease or installment to a mobile operator, the bank will know. Bad payment discipline logically has a negative impact on creditworthiness.
Can the creditworthiness be increased?
Insufficient or low creditworthiness can sometimes be increased. The most common is to invite a guarantor or co-applicant. What is the difference between them? The guarantor requires the bank to repay the loan only when the debtor does not meet its obligation. However, the co-debtor is equally responsible for repaying the loan as the debtor.