What is and what is the creditworthiness?
Creditworthiness is one of the best known terms in the field of economics. Probably everyone has met this term many times and has some ideas about what creditworthiness really is. On the website of the Credit Information Bureau, we read that creditworthiness means “the possibility of repayment of a loan drawn with interest, on dates specified in the contract”. This is, of course, a very general definition.
But what is the creditworthiness in practice, where are the problems with creating a precise definition of the term and what factors depends on whether the bank or the credit company will assess our creditworthiness in a negative or positive way? Let’s look at this issue a little more thoroughly and try to answer the above questions.
What is creditworthiness and what does it depend on?
First of all, it should be noted that there is no de facto and one general concept of creditworthiness. The meaning of the term really depends each time on the set of practices and methods by which the institution assesses our creditworthiness. The most important differentiating factors are here: the status of the lender (bank, loan company and so on), the type of loan product (“weekend”, consumer loan, mortgage loan), individual policy in the field of verification of creditworthiness conducted by a given entity.
In other words, our creditworthiness can be assessed completely differently by the bank and otherwise by, for example, a loan company. As for the bank, the rating will also vary depending on the type of loan and its amount.
However, despite such significant differences, one can point out several factors that most often affect the creditworthiness. These are:
- 1. Earned income
- 2. Form of employment
- 3. Credit history
- 4. Fixed costs incurred by the potential borrower
- 5. Capital owned (for some types of loan products)
As it is well-known, in the case of banks, the policy regarding the verification of clients’ creditworthiness is of a rather rigorous nature. If we achieve adequate income, we have permanent employment but at the same time, our personal data is for example in the database of the Credit Information Bureau, the National Register of Debtors and so on, the bank will most probably refuse us services even when it comes to regular consumer credit for a relatively small amount of money.
The policy of loan companies looks slightly different (they should not be confused with parabanks). Here we can find both offers of companies checking creditworthiness in a similar way to how banks do it, as well as an offer addressed to people who, for example, have debt. Most often, however, loan companies check various databases, including especially KRD, BIG InfoMonitor, BIG and so on.
What’s more, there are both loan companies on the market, which in the case of applying for a loan will demand from the client, among other things, a certificate of income, as well as those that are enough for the client is of legal age and has a check-in in Poland.
Creditworthiness and the nature of the loan product
Broadly speaking, the creditworthiness is assessed the more rigorously, the higher the sum of the loan the client is seeking. There are several reasons for this. The repayment date of, for example, consumer credit is at most a few years. In this case, the bank has much more opportunities to predict the financial future of the potential client, ergo the risk associated with granting the loan is smaller. In the case of, for example, a mortgage with a repayment period of 25-30 years, the risk is obviously significantly increasing. In the latter case, the bank will most likely take into account not only the income we achieve, our age and our credit history, but also factors such as the perspectives of the industry in which we work, the prospects of our profession, the type of education we have.
The first two factors seem quite clear: the bank simply analyzes the risk of losing our income source in the future. The third of the factors will mean for the bank the probability that in the event of a possible job loss we will be able to, for example, gradually retrain. It is not difficult to guess that people with extensive education and numerous different competences may be in a better situation when it comes to assessing creditworthiness with long-term loans.
While remaining in the area of creditworthiness assessment by banking institutions, it is also worth mentioning that banks often treat borrowers who are their regular clients differently than others, who simply apply for a loan. If we have a current account in a given bank, deposits, savings account, participation units in investment funds, etc., the bank will most likely treat us milder than a completely new customer. Of course, this is not an iron rule, because sometimes the banks have a more attractive, promotional offer directed to new customers. Usually, however, the customer is checked by the bank as a less risky customer. In the case of many banks, customers with current accounts, deposits, savings accounts and so on can take out, for example, consumer loans in a completely online manner: simply complete the application, enter the relevant data and confirm the contract using the authorization tool.
In this case, the creditworthiness of the client is usually not assessed by a bank employee, only the internet system. In practice, this often means far-reaching freedom: it often happens that the customer in one online application for a cash loan gives information that his monthly income is PLN 3,000, and in the next application, for example, PLN 4,000 , although the customer’s earnings have not really changed. However, despite the differences, the system accepts both applications. Of course, this is just an example taken from one of the Polish banks whose names we will not mention. Nevertheless, it is a symptomatic example, i.e. one that can be considered as a manifestation of a more general tendency.