Credit score

What is a credit score? What is a credit score used for and what is a credit score based on?

In this article, we focus on the concept of credit scoring. This article is for you if you run a business, are an accountant, financial manager or otherwise have an interest in working with the concept of credit score.

What is a credit score?

A credit score is an indication of the creditworthiness of an individual or company. The credit score is often a number, but can in principle also be three colors: red, yellow, green - or letters.

Whatever the value or form of the score, it is used to assess a debtor's creditworthiness - and thus how much credit and how long credit you should give your debtor. The score can also be used when granting a loan from a bank or mortgage company.

If the credit score is low or poor, it will often mean that the credit period on an invoice, for example, is reduced - or dropped completely. This can mean that it is often a good idea for the company to demand payment upon delivery of the goods or services.

Creditworthiness is often another widely used word on the same topic. Basically, creditworthiness and credit score cover the same thing; if the creditworthiness is high, higher and larger credits can be granted than if the creditworthiness is low.

What is a credit score based on?

A credit score can be based on a wide range of economic, demographic and geographical factors - and is often determined by the creditor or the provider the creditor chooses for the job.

The more factors you use as a basis for your credit score, the more detailed it will be.

Unfortunately, most assessments/scores today are based on very few sources; for example, many companies only look up whether the debtor is registered in a debt register such as RKI/Experian or Debitorlisten.

Can you create a credit score yourself?

Yes, basically, as a creditor, you can easily create your own scoring system for credit scoring - even with data from your own ERP system.

Is the customer good at paying your invoices? Does the customer pay on time? etc.

But you can also include information from public registers such as Proff, CVR etc.

However, by building an assessment yourself, you very rarely get external information from, for example, a debt register.

It is often banks and lenders that have built their own creditworthiness assessments, as they often have a much better insight into the borrower's finances, consumption, financial circumstances, other loans, mortgaged assets, salary and income, turnover, etc.