Credit rating

Companies and organizations are credit rating private and corporate customers like never before - but what's the benefit? What does credit rating mean? How is a credit rating calculated? And how does a credit rating work?

Get the answers in this article and read everything you need to know about the topic.

What is a credit rating?

A credit rating is an assessment of the creditworthiness of a private individual or company. The assessment can be made in many ways and based on a wide range of parameters.

Basically, it's up to the company (creditor) to set the framework for the assessment - and thus what they want to know about the customer(debtor).

In other words, a credit rating is not one overarching thing that measures the same thing. Some companies are thorough in their assessments, while other companies may not check up on as many areas.

Read more: Credit rating at private individuals

Read more: Business credit rating

How does a credit rating work?

A credit assessment can be done in many ways, but the typical approach is for companies to purchase access to a system that does the assessment for them. The assessment can either be automatic, ongoing or manual. Many larger companies today have automatic and continuous credit scoring of their customers, where they continuously monitor and update their customer information and credit score.

Many small businesses often just manually run a credit check on new customers.

There are often many different ways to make credit ratings and it basically depends on the creditworthiness of the company.

Also read: 5 reasons why you should data-wash your customer database

What does a credit rating contain?

A credit rating can contain many elements and typically depends on what data the company (creditor) wants on its customers (debtor).

A typical assessment of the customer's willingness/ability to pay includes:

• Lookup in debt registers (e.g. RKI or Debitorlist)
• Basic customer data
• Previous payment history, if any
• Demographic and geographical information
• Accounting information if the debtor is a business

However, many private companies only choose to look up a customer in a debt register such as RKI, which will then report if there are known unpaid conditions. This is often the least comprehensive and least detailed credit assessment.

Banks and credit institutions are among those whose credit ratings are the most detailed. For example, they often include tax and salary data.

The more information that is processed in a credit rating, the more detailed the rating can be. However, more information often comes at a higher cost - so in practice, it's a trade-off between the price of the credit rating and the actual credit risk the company faces.

What is a credit rating used for?

You use a credit rating to assess whether and what credit your customers should have.

If the customer has a poor creditworthiness, also known as a credit score, it will be beneficial to limit the credit to the customer.

Limiting credit can be anything from limiting the amount the customer can buy on credit, shortening the credit period (payment deadline) - to requiring the customer to buy in cash upon delivery of the goods and thus not receive credit.

What does it mean to give credit?

Providing credit means that the customer receives a product or service before payment for the product or service has fallen due.

Credit is often used in B2B transactions, where two companies trade with each other. Here, goods are often delivered with an invoice. The invoice then has a payment deadline of typically 7-14 days.

It is the 7-14 days that is referred to as the credit period.

The better the credit rating - the longer the credit period you can theoretically give your customers.

Can you do a credit check yourself?

Yes, you can make your own assessment of your customers' financial situation. In Denmark, for example, accounting data for companies is publicly available, so you can form an impression of the customer based on historical financial information.

In addition, you can ask the customer to verify themselves, get their full name, address and the like - and from this information form your own picture.

Try Qatchr

Vi er en digital tjeneste, der gør det nemt at finde kreditoplysninger på dine kunder – både private og virksomheder.

Qatchr takes in a wide range of relevant information and gives you a status and credit score on your customers.

We can help you easily assess your customers' finances and willingness to pay - whether you want to do it manually or automatically.