All you need to know about Schufa

What is a Credit Score?

A Credit score is a measurement of how reliably one has met their financial obligations like credit card payments, utility bills etc. The Schufa arrives at a Base score that range from 0% -100%. They follow their own methodology to arrive at this score, which is not transparent.

                 However, a Schufa score of 100% is highly implausible because that assures one’s payment capacity as 100% guaranteed which is extremely unrealistic. Even if their past credentials speak out loud for them, the saying goes equally true as in the world of investments: “Past Performance is no guarantee for future results”. Hence Schufa score is calculated every quarter and ranking is accorded based on the new score.

Moreover, there are other Industry- specific scores because the possibility of defaulting differs from sector to sector. Defaulting over your home loan is not the same as defaulting over online purchases. Thus, it implies that every individual has many scores – i.e., one base score and many other industry-specific score. Banks predominantly look for your Base score and follows a ranking system based on their risk of default.

 

The below table illustrates this:

Schufa Score

Risk of default

> 97.5%

Very low risk

95% - 97.5%

Low risk

90% - 95%

Increased risk

80% - 90%

Significantly increased risk

50% - 80%

Very high risk

< 50%

Critically risky

 

 

The greater the risk of default, more will be the interest rate charged, or one may not be entitled to receive a loan. It is at the discretion of the bank to grant loan or not since banks are engaged in the business of making money and not losing. So, with a bad Schufa score, one may have to run from pillar to post to avail loans and may end up with high interest rate. Once suspicious, Schufa may shelve your loan request for a year thus discouraging the banks to disburse loan.

 

How does Schufa works?

Schufa collects payment data from its 10,000 Business partners. These business partners include Credit card companies, mobile phone, utility bills, electricity provider, online shops and all the companies that you carry financial transactions with. As per their website, they have information about 68 million people living in Germany whereas the total population itself stands at around 83 million. Therefore, this data is not any less all-encompassing. If you draw parallel with Facebook, the largest social media platform in the World, has around 33 million users in Germany, which is less than half of Schufa’s data.

Schufa collects information about:

  1. Personal data: Name, birthdate, and address
  2. Information about bank accounts and credit cards
  3. Mobile phone contracts
  4. Leasing contract
  5. Loan agreements
  6. Installment paying transactions
  7. Guarantees and payment defaults

 

How to get a Schufa Report

One can get an access to Schufa report through online (paid service) by simply filling the form in their website. Expats need to upload a copy of the passport for easier identification. You can also get the report by post which is free of cost.

 

Implications of a bad Schufa Score

A bad Schufa score is hard for anyone living in Germany. With a poor score, one’s dream of buying a home loan can be sabotaged very easily no matter however good his current financial situation be. Not to forget, the opportunity costs involved as the price of real estate shoots up by 4-5%.  In absolute terms, it may run as deep as few thousand Euros.

It is also not easy to quickly change/manipulate one’s Schufa score when your credibility per say is subjected to question.  But certainly, there are few tips to be followed that can drastically improve your Schufa score.

 

How to improve your Schufa Score?

  1. Limit your bank accounts (GiroKontos)especially those that are not in use.
  2. Also discard those credit cards that are lying simply because you got it for free through some promotions. More cards mean more room for suspicion. This may negatively affect your Schufa score.
  3. Frequent change of address is also not encouraged by Schufa. Recently, in Instagram someone sent a screenshot of their Schufa base score as just 2%.  Now 2% means Schufa believes that probability of the person defaulting to his payment will be 98%.  On discussion with Schufa, he came to know that Schufa temporarily reduced his base score just because his address was not in sync. Apparently, they again recorrected his score.
  4. Your credibility score much depends on your payment of bills on time and in full. Just one unpaid bill can badly affect your rating and you may lose your credentials easily. Make your payments promptly and if you find an invoice to be incorrect, do not ignore it, but reach out to them before they reach out to Schufa. Never default on your loan as well. The least you can do is inform them prior of your inability to pay that proves your genuity.
  5. If you are financially stressed (temporary job loss, illness etc) and you are unable to pay back, at the least, make an attempt to reach out to them for a negotiation. Failure to do so, may result in abrupt slump in the score.
  6. Use of Dispokredit often can affect your Schufa score badly. Dispo is the overdrawing of your saving’s account into negative. But despite the availability of Dispo, if one is not using it, is considered very good by Schufa. Also, the interest rate charged to avail Dispo is amusingly very high, thus discouraging its use.
  7. While applying for a loan, look for credit conditions which is Schufa-neutral, instead of running for more credit. The best offers for your loan can be found through Schufa-neutrale Konditionsanfrage.
  8. Never have multiple small loans which sends a negative signal to Schufa. Try to consolidate all those small and avail one large loan which will enhance your creditworthiness.
  9. Protect yourself against Identity theft. In the event of such mishap, inform Schufa immediately so that companies are notified of your victimhood. This, by any chance, reduces outright rejection of your application in future.  “MeineSCHUFA Kompakt” even protects you against Identity theft.
  10. It is likely that data entered in the Schufa report is incorrect. Inform Schufa with proof about this and they will go for self-correction. In case of any disagreement, one can reach out to Schufa Ombudsmann for settlement of disputes.

 

A Negative Schufa-entry

Whenever you fulfill your payment obligations on time, your Schufa score increases; be it mobile phone payment, monthly loan debit, leasing contract or online purchases. Therefore, majority of the Schufa entries are positive. Also, a schufa score has least to do with your job or income.

Above all, it is not that easy to get a negative Schufa-entry. A company must follow three steps before giving negative Schufa-entry.

  1. Send a reminder by post for not fulfilling payment obligations.
  2. Wait for a period of 4 weeks, and then send another reminder.
  3. In either of these reminders, the company should warn of a negative schufa-entry if not paid on time.

Often, one may get a negative Schufa entry without any mistake on their part. For e.g. If you get any wrong invoice from a company, you cannot simply ignore it. The company reserves every right to impose you with a negative Schufa even in this scenario. And then it becomes cumbersome to remove the negative entry. Therefore, the onus lies on the individual to put an end to any kind of discrepancy.

 

Consequences of a Negative Schufa

With a negative Schufa, one may face inconvenience to do even the basic transactions. Some of them are listed below:

  1. Opening a bank account
  2. Renting an apartment
  3. Applying for an insurance
  4. Getting a credit card
  5. Leasing out a car
  6. Mobile phone contract
  7. Purchasing through online shops
  8. Changing gas provider

The validity of negative Schufa entries can last up to 3 years, so utmost care must be given to prevent one from a negative entry, wherein false entries get deleted immediately.

 

Schufa under Criticism

  1. It is criticized as evolving into a “privately controlled central database”. This may, in future, jeopardize the data protection rights of the citizen.  
  2. Schufa data is often found to be incomplete, out of date or incorrect. The Schufa works on the basis of “Reciprocity Principle” whereby the company’s business partners are contractually required to report updates on data. And because of its link with 10,000 business partners, it is loaded with lot of errors. Nevertheless, Schufa immediately rectifies and updates the same, when notified about it.

 

Despite its criticisms, it has managed to curb fraudulent practices, identity theft and ensure long term consistency in maintaining contracts. Schufa has emerged as an incredibly important tool in terms of managing personal finances and financial planning.