How is a business card of financial reliability or credit history created?

When they go to the bank for a loan, potential borrowers usually feel a little worried that the bank will refuse to lend money, and if they grant a loan, then under what conditions.

To get a better understanding of how the credit history is created and how it affects the possibilities for individuals and companies to get money, explain the Association of Business and AS “Kredītinformacijas Bureaujs” .

Credit history is a form of financial assessment of a person, which provides comprehensive information about a person or company’s financial obligations and their performance. This includes both current and past credit obligations, as well as other debts, such as utility bills and telecommunications bills, if they are overdue. The credit history can also show information about tax debts, bankruptcy proceedings and various prohibitions registered in the Register of Companies.

“The Credit Information Bureau in this case acts as an intermediary between lenders and consumers, ensuring that financial institutions can assess the creditworthiness of potential borrowers. We are like a librarian who collects information, but in the end the borrower is the decision maker,” says Jānis Timermanis, chairman of the board of JSC “Kredītinformations Biroja”.

Currently, in Latvia, the data archive of the Credit Information Bureau shows active liabilities for about 800 thousand inhabitants, of which 20% or 160 thousand are in arrears with a bill of at least 150 euros for more than 60 days. The total amount of delay is EUR 1.1 billion. It’s a good thing that people who don’t pay now are about 5-8% less than in 2020.

Credit rating is an important indicator that predicts in a single number the probability that a person will delay payments in the next 12 months. It should be emphasized here that the credit rating is calculated not only by the credit bureau – each bank has its own credit rating models, and they can be different for different financial products , such as mortgage loans, consumer loans or rent. In any case, the client’s high credit rating indicates good credit, which may result in a more favorable loan situation. On the other hand, a low credit rating can limit the possibilities of obtaining a loan or create the need to look for other sources of financing, often more expensive.

“It’s like a driver’s license. If you are planning to give your car to someone, the first question is, do you have the right? Next, we are interested in how well you know how to drive, how long your driving license is, how many penalty points you have, whether you have caused an accident before this? If a person has taken on responsibilities, he has successfully managed them – so he knows how to drive,” Timermanis points out the parallels.

For individuals, credit history is an important element that affects their chances of getting a loan in the future. Being on the list of debtors, the restrictions are very big, especially if a person has an active socio-economic life. The first and most important thing is that if a person regularly delays payments or collects debts, it can cause problems in getting a loan from any credit institution – bank or non-bank lender. If a person does not intend to get a loan, being in the database can also make life difficult, because the data in the Credit Information Bureau is also checked by telecommunications companies, companies that rent housing, cars or long-term equipment, and others. . That is, credit history is important not only for banks, but also for other service providers who accept credit risk in transactions with private individuals.

“In Latvia, 31% of debtors are between the ages of 20 and 30, while 21% are between the ages of 41-50 and only 13% are between the ages of 51-60, which shows how difficult it is for their financial management in particular. for young people. What is surprising – a very small part of 160 thousand debtors have mortgage loans – only 7 thousand, and less than half of these 7 thousand, or 3 thousand, have problems with repayment mortgage loans.” Download Janis Timermanis notes.

When evaluating a customer’s credit history, banks take into account both internal information from the credit institution and data from external registers, the main ones being the credit register of the Bank of Latvia and bureau credit information.

It is important that there are no active payment arrears, and the amount and consistency of historical arrears are also evaluated, because these all indicate the financial literacy of the client. For example, both the credit register of the Bank of Latvia and credit reference offices store information about previous debts. Sometimes the client thinks that if the delay is paid, the bad credit will also be erased, but unfortunately it is not – the record of historical debt in the credit history remains in both records for five years after the debt is paid.

A loan that does not match the customer’s ability to repay the debt can result in a very negative credit history. Therefore, when accepting obligations, the client must evaluate his own options critically and responsibly. Therefore, regular use of fast loans can affect a very negative credit history.

Also, guaranteeing a loan to another person, which may delay payments, can have a negative impact on the guarantor’s credit history. Therefore, before accepting the guaranteed obligations, one must equally importantly assess one’s ability to repay these loans in the future. On the other hand, for a positive credit history, it is important that the client’s income is official, regular and can be verified with a real employment contract.

A good credit history is also especially important for companies. It could affect the company’s ability to obtain loans for development, working capital funding or other business needs. As Timermanis explained: “The credit risk of a company is assessed according to criteria that differ from those of a private person, such as profitability, liquidity and equity adequacy. In order for the company to be able to secure its obligations to suppliers, it should have enough liquidity in at least three months.” He also says that every fifth company has negative equity. Latvia with a turnover of more than 50 thousand euros, which greatly limits the possibilities of these companies to get credit.

In addition, Timermanis points out that traditional company annual reports have one major drawback – they are prepared once a year, so they do not always provide current information about the financial position of the company. The Credit Information Bureau allows you to check payment delays in real time, providing an up-to-date picture of the company’s financial situation and its ability to meet obligations today, not after the reports submit financial.

A credit history is long-term information that shows the financial control and trustworthiness of a person or business. To check your own, you need to go to the website manakredivesture.lv and identify yourself with the help of internet banking. Next, you need to create your profile – as soon as it is created, individuals will be able to view all credit information about themselves and their obligations in one place for free.