What to know about SCHUFA?

What does Schufa do? Schufa explained simply!

Although everyone has heard of Schufa, it remains unfamiliar to many. Yet, it has a significant financial impact on our lives. In this article, you’ll learn exactly what Schufa is and what purpose it serves. You will also find out how you can get a free annual Schufa report and improve your personal Schufa score.

What is Schufa and its purpose?

Schufa stands for “Schutzgemeinschaft für allgemeine Kreditsicherung” (Protection Association for General Loan Security). Sometimes jokingly called a “debt trap,” which, however, is not accurate.
Schufa is a credit bureau that collects data on the creditworthiness of various economic actors and sells this information to other or the same actors. The collected data provides information about the creditworthiness of potential customers.
Creditworthiness describes a customer’s ability to repay a loan fully and within a set period. It indicates the likelihood that someone can repay a loan as agreed.

How does Schufa work?

The function of Schufa is explained using the following example:

Imagine there are 5 banks in Germany, and you are a potential credit fraudster. You go to Bank A and apply for a loan. After the loan amount is paid out to you, you decide not to repay it. Bank A registers the credit fraud and bans you from future credit issuance. Additionally, the bank may take legal action against you. If the 5 banks do not communicate with each other, it would be easy for you to repeat the credit fraud at Banks B to E. However, to prevent this fraud from happening more than once, communication among them is necessary. In an economy with 5 banks, direct communication might still be possible.
Since there are about 2,000 credit institutions in Germany, a central institution like Schufa is necessary to simplify the exchange of credit data. It gathers information from over 9,000 contract partners, including telecommunications and electricity providers, banks, and savings banks. The contract partners submit credit-relevant information to Schufa. For example, a bank reports when you have taken out a loan and when it is due to be repaid. If you repay the loan on time in the agreed installments, this information is also passed on to Schufa, positively affecting your personal creditworthiness. Your creditworthiness can also deteriorate, for instance, if you fall behind on loan repayments or can no longer or do not want to repay a loan. Schufa has collected about 813 million data points on 5.3 million companies and 67.2 million private individuals in Germany. Mathematically, it holds data on the creditworthiness of every adult German citizen. However, Schufa collects not only information on credits but also other data that can be used to assess your creditworthiness. This includes, for example, your residence, the bank where you opened a checking account, or payment obligations from your mobile phone contract.

Schufa Scoring

Credit institutions and companies request the existing Schufa data as needed. For instance, if you make a loan inquiry at a bank, your bank advisor will ask you to allow a Schufa query in your name. He then receives against a small fee the data about you that is stored at Schufa. The data at Schufa is anonymized. Your bank advisor will not receive a specific list of your individual contracts over mobile phones, credit cards, or similar. Instead, your data is aggregated into a Schufa scoring. This scoring expresses the probability that you will not properly repay a loan. If you are classified into the best scoring class A, you are assigned a default probability of 0.85%. This means: Schufa estimates that there is a 0.85% chance that you will not repay a loan on time, in full, or at all. The default probabilities are much higher in scoring class G at 8.51%. A bank that disburses a total loan volume of 100,000 euros to 100 borrowers with the G rating will incorporate this high default probability into the interest rate.

Therefore, the interest rate must be at least 8.51%, not including the bank’s profit margins or staff costs. In practice, being placed in scoring class G will result in the bank refusing to grant a loan. However, there are also providers that do not seek a Schufa report. Thus, even with a poor Schufa score, you still have the opportunity to open a checking account or obtain a credit card.

Schufa Report

If you want to take out a car loan or a home savings contract, you might be interested in knowing what data Schufa has stored about you beforehand. By law, Schufa is required to disclose this information. You have the opportunity once a year to receive a report. In a letter, Schufa lists in detail the data it has stored about you. You should take advantage of this opportunity at certain intervals. On meineschufa.de, there is a fee-based service that you can access online. However, a free version also exists on the site, as Schufa is legally obligated to provide this information to you. For the free alternative, you just need to fill out a PDF document, print it, and send it along with a copy of your ID card or passport by mail to Schufa. If you find after receiving the report that Schufa has stored incorrect data about you, you can create what is known as an objection letter. With this, you contest the incorrect or incomplete information. In fact, Schufa has often been criticized in the past for this reason. However, the objection process is somewhat complicated. This is to prevent unpleasant information from being deleted too easily. Schufa also regularly deletes outdated data. For example, if you have repaid a loan properly, this information will be removed from the database after 3 years. A query about a loan and its conditions will be deleted after 12 months. All deletion periods can be found on the Schufa homepage.

Influencing your Schufa Score

You might now be wondering how you can influence your Schufa score. First of all, it is very positively rated if you behave according to contract: For example, if you repay a loan promptly and in the agreed installments. It is also not a negative sign if you have multiple credit contracts or checking accounts. This shows that you enjoy high trust from banks. It negatively affects you if an account is terminated by the bank, reminded, or seized. Moreover, you should avoid too frequent account switches or credit inquiries. If you want to compare different loan conditions from several banks, make sure that the bank advisor does not retrieve information from Schufa at every branch visit. Otherwise, Schufa may receive this query from different banks and downgrade your creditworthiness. If you are not yet ready to conclude a loan, you should inform your bank advisor that he is not authorized to request information from Schufa. Only when the contract is about to be concluded can you grant him this permission.

Frequently Asked Questions

Schufa stands for “Schutzgemeinschaft für allgemeine Kreditsicherung” (Protection Association for General Loan Security).

The scoring expresses the probability that you will not properly repay a loan. Different classes are distinguished – the better the class you are classified into, the more likely you are to be granted the loan.

If you do not repay a loan on time, your account is seized, or you have changed your account very often, it negatively affects your Schufa score. On the other hand, if you always repay loans promptly and “do not incur any debts,” your creditworthiness improves.

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