When buying a property in Germany, many foreign buyers don’t know about SCHUFA for Foreigners in Germany and its consequences.
SCHUFA is one of the first German words foreigners hear of, and not because they were reading about it in a guidebook. Often SCHUFA is the first that many foreigners hear of after they arrive in Germany. At first it will be pleasant enough, perhaps you have been renting an apartment and then your landlord pulls your SCHUFA report and sees that you have been a less than perfect payer in the past. Then again the credit card company refuses you a higher credit limit because your SCHUFA score is too bad. You then have to go with a prepaid phone because you are refused a contract on normal payment terms. This is all very unpleasant but even more galling is when you read that wealthy Germans have been turned down for a mortgage or have had to accept an outrageous interest rate for their home.
Read about the german bank’s preference for financial conduct over income for loans or lines of credit. What is not generally known by many expats is SCHUFA – a data-bank that records whether or not someone should be considered trustworthy for a landlord, a potential employer or when applying for a loan or line of credit. Knowing how SCHUFA is likely to report on you could save you a lot of future problems.
In this article we explain how SCHUFA works, why it is relevant for expats and how you can improve your SCHUFA score fast. Reading this blog can save you from many rejections, will help you to get more favourable interest rates on your loans and save you a lot of trouble while searching for an apartment in Germany.
Why SCHUFA Confuses So Many Expats
When moving to Germany many people think that having a good salary will allow them to get a loan or other credit facility. Salary is of little importance in Germany in comparison to your past financial history. This information is stored in a negative credit history database called SCHUFA, and is held on the entire German population. When a German lender checks your SCHUFA credit file they will see your past financial history.
A small change in your SCHUFA score can have big effects on your interest rates and resultant costs. For example, a SCHUFA score of 720 as opposed to 780 might result in interest rates of 3.25% as opposed to 3%, resulting in additional costs of €10,000 over the 20 year mortgage period.
We are trying to remove unfair discrimination against expats but are not trying to give them unfair advantage. We are neutral and trying to prevent unfair discrimination but that does not mean that a poor credit profile will automatically be given to an expat. It is true that the banks perception of the level of risk that an expat represents is possibly greater than a native German speaking resident but if the expats credit profile is less bad than someone else who is considered to be a good customer then it is because of the circumstances otherwise everything seems favourable. From this you will get an idea of how SCHUFA registered your actions and how you can create a positive financial profile that banks like to see.
What SCHUFA Actually Is and How It Works
What SCHUFA Is (and What It Isn’t)
SCHUFA is the largest provider of private customer data in Germany and supplies data on a national basis. SCHUFA does not decide whether or not you will be granted credit. It supplies the relevant banks, insurance companies etc. with relevant information.
For every Transgender individual, TransUnio provides a risk score for Banks, Loan Institutions and other organizations, on the basis of which they can make decisions.
So, as an expat, you also want to know this: SCHUFA never states approve or reject on your application request. The actual decision to approve or reject your loan or credit request is made by the lender. What SCHUFA does, is provide reports based on your credit history to banks, landlords, insurance companies, cable companies, mobile phone providers and others for their consideration of whether or not you are a reliable bill payer.
What Information Does SCHUFA Track?
Many people are unaware of what kind of information is hidden in their SCHUFA data. Knowing what SCHUFA has on you can make things clearer for you. Your obligation to pay interest and your repayment behaviour are stored in your SCHUFA file as well as data from banks and credit providers on your credit lines, current accounts, overdraft facilities and outstanding loans. You may also find information on rental agreements for apartments and houses as well as supplier contracts for telephone, electricity, gas and Internet. By paying your debts on time, fully complying with all agreements carefully and living at the same address for a longer period you are demonstrating very good credit behaviour.
The Big Myth: High Salary Equals High Score
Income myth. SCHUFA does not have information about your income. SCHUHA does not know how much you are earning and can’t find out either. We have no information about your occupation, your salary, your employer or your capital. Higher earnings will not help to lift your SCHUFA score if your payment behavior is still not satisfactory.
A common misconception held by many an expat is that your credit score is based on your income. It isn’t.
Video Explanation
It appears that many of us learn best through video, so I have searched far and wide to find the perfect explainer for how SCHUFA works. After reviewing several options, I have selected a nice 3-minute video that not only explains how SCHUFA works, but also why German businesses actually care to look at the SCHUFA entry, and finally how expats’ financial histories will show up in the SCHUFA entry and affect the chances of getting a mortgage in Germany.
Why SCHUFA Matters Even More for Expats
When applying for a mortgage lenders will usually check your SCHUFA credit report together with other details. The SCHUFA score is one of the things a bank looks at when applying for a mortgage. Your SCHUFA score is already indicated before your credit report is looked at and forms a first impression of your profile. It can decide whether you are approved for a mortgage and at what interest rates. A lot of people do not know that after being rejected for a mortgage, your SCHUFA score can still be negatively affected by other banks. Timing is everything when it comes to applying for a loan. A bad timing results in only little additional risk, which, however, can quickly turn into a relevant additional expense. Your credit profile is at its best just before you apply for a loan. The SCHUFA supplies banks with a wide range of information relating to a customer’s past. Thanks to this, the decision on a loan is no longer left to chance. It is based on the hard facts stored in the SCHUFA file.
Why Expats Usually Start Behind
As an expat, your SCHUFA experience is different from that of a local German. Initially, most expats will have very little or no SCHUFA entry at all due to their lack of financial history in Germany. Furthermore, as an expat, your circumstances may mean that you are less likely to move within Germany and consequently change your address with SCHUFA less often. Additionally, your circumstances may also mean that you are less likely to secure contracts or sign agreements in the German language and as a result SCHUFA may find it more difficult to verify information or process payments.
Thin files in Germany are never neutral. They raise immediate skepticism at banks. This puts expats at a disadvantage when applying for a German mortgage compared to their native born counterparts who have been steadily building up their SCHUFA credit history over the years.
How Your SCHUFA Score Gets Calculated
The SCHUFA-score is calculated using advanced statistical models. It is intended to give an indication of a person’s future creditworthiness. SCHUFA places greater importance on the long-term repayment behaviour of a customer rather than on temporary developments.
Opening multiple current or savings accounts as well as applying for several credit or installment loans within a short period of time can even have a negative effect on your SCHUFA credit score – in spite of fully meeting your repayment obligations. The reason for this is that SCHUFA stores information about any unusual movements on the market (so-called suspicious credit business).
Understanding SCHUFA Score Ranges
Knowing the score range of your SCHUFA creditworthiness score gives you a rough idea of your position. A good SCHUFA score signal a low default risk on a loan and as a rule are granted with very favourable conditions. A middle range score will make the bank examine your application more closely. A poor score will largely deny you a loan or make very expensive, inferior credit very expensive.
Unfortunately, there is no fixed SCHUFA score for credit scoring. All banks use the information from SCHUFA in their scoring models differently.
How SCHUFA Affects Your Mortgage
While the SCHUFA score is known primarily as a decisive factor in mortgage approval, it can also have an impact on your mortgage conditions later on. And this is not just a matter of a few percentage points. Small differences in the score can translate into significantly higher or lower interest rates. So, as a borrower, you should not ignore your SCHUFA score.
One often forgets, that small differences in interest rates are amplified over the 20-30 years of a mortgage. Of course getting a mortgage approved is one thing, but getting a good deal is yet another thing. It might therefore be a good idea to prepare your SCHUFA profile before starting your house hunt.
SCHUFA’s Updated Score Model
Why SCHUFA Changed Their Scoring System
The point score is a measure of creditworthiness developed by SCHUFA. It has recently changed to comply with new legislation and increased demands for clarity from consumers. The new point scores are included in the current score.
What Actually Changed
In recent times SCHUFA has moved on from a previous scoring system to a more differentiated scoring system with clear categories. However, fundamental criteria remain the same. Long-term stability, regularity and responsible financial conduct continue to be the most important criteria. What has changed is how the score is calculated and made available.
Common SCHUFA Mistakes Expats Make
Behaviors That Hurt Your Profile
Mistakes expats do: You might think of leaving some bank accounts back in Germany for your parents to look after for you. But having too many bank accounts can harm your SCHUFA score, as the average age of your existing accounts might drop and as such reduce the interest rates for future loans. And if you keep taking the “welcome packages” for new current accounts (because they seem so tempting), it will end up biting you in the end. It is better to manage all your current accounts with one bank (or even partner banks) in the long run.
Unfortunately, too many inquiries into your credit worthiness can give the impression of financial stress. Moving around frequently can indicate instability, and closing old established accounts to quickly to boost your credit score can have the opposite long term effect of removing the benefits of having long standing accounts in your SCHUFA file.
In many other countries such behaviour is no big deal, in Germany however it is classed as a risk by banks.
How to Improve Your SCHUFA Profile
Simple Steps That Work Over Time
There are some basic rules to improve your SCHUFA-score. Being reliable matters. That means to repay your credits in a timely fashion. Setting up direct debit on payment due date is easy and helps you to pay on time. Not to sign up for leases for things you don’t actually use. And not to make payment arrangements for small sums: the negative impact on your SCHUFA-score is greater than saving some cash. Closing no accounts will improve your score over time.
Your student profile is only good if you check your credit status in time. How is your student profile? In just a few seconds you can check your credit status and find out how you are doing. How good is your student profile from 1 to 5? Use this as a basis for checking your credit status with the following checklist on how German banks rate your credit history.
The following report is written for expats and should not be used as an official score or for obtaining a home loan.
Personal Stability
I have provided the same address in Germany for at least 12 months so this should cost no more.
I haven’t moved around much in recent years
Banking and Accounts
One main bank handles most of my transactions
I rarely open or close accounts
Contracts and Obligations
I have current contracts for this opportunity.
I won’t break up purchases for small amounts of money.
Payment Behavior
Bills and automatic payments go through without problems
I occasionally overdraft or have a slightly negative balance.
Credit Activity
We have not pursued additional financing in the last few months.
I don’t do unnecessary credit checks
SCHUFA Awareness
“alle Werte, die von der Schufa ausgespiecht werden, die aber erstens bereits im letzten Jahr abgerufen wurden”.
Is it possible to check for incorrect or out of date help?
How to Read Your Results
Do the criteria listed below correspond to your circumstances? Then banks will rate your SCHUFA credit report positively.
We un-match you in a few areas so it’s probably best not to come to the banks to discuss a mortgage just yet. Making a few small changes now could make a big difference in how you get assessed for a mortgage.
What to Do Next
Where are you at? What could you improve on with a little consultation? Let us do a 15 minute short consultation to find out.
SCHUFA and Property Planning
Check Your SCHUFA Before You Start Looking
It may be wise to check your credit rating before house hunting. Checking your credit status before you start house hunting is vital to avoid any misfortune and could save you a lot of time and heart ache looking at properties that you will not be able to purchase.
You can also search for available properties in the Real Estate Search Engine on financeforexpats.de.
How SCHUFA Affects What You Can Buy
The risk that a bank associates with a customer profile is decisive for the amount that they are prepared to grant in loans and on what conditions. The SCHUFA score is an essential component of the real interest rate for home loans that banks calculate for applicants. And the difference in interest rates makes quite a difference in what your budget allows.
This calculator shows you how the terms of the finance can affect your real purchasing power.
SCHUFA for Expats and New Residents
No German Credit History? Here’s What Happens
As an expat you probably do not have a credit history in the SCHUFA file in Germany. However, having little information in your file is hardly ever viewed neutrally in Germany and is classified as a risk. It is therefore advisable to start building up a positive credit history as quickly as possible.
You want your SCHUFA score to turn green ? Building up a good SCHUFA-score and credit profile takes time. Generally it will take 1-2 years until your score is that good, but the first 3 months are crucial. Therefore it is slow and steady that will win the race.
Common Questions About SCHUFA for Expats
What is SCHUFA in Germany?
SCHUFA is the biggest credit information provider in Germany. It supplies the so-called creditworthiness assessment for every applicant of credit from banks, landlords and other service companies. In his risk assessment SCHUFA prepares information on a person’s behaviour in connection with contracts for banking and other business transactions (including consumer and commercial transactions), their payment behaviour and their bank and credit accounts. However, SCHUFA does not decide whether a customer is granted credit, overdraft facilities, accommodation for rent etc. This decision is made by the companies that approach SCHUFA. SCHUFA only supplies information and on this basis the companies decide for themselves whether they wish to grant a loan etc.
Can Expats Get a SCHUFA Score?
For those who are only staying in Germany temporarily (whether from abroad or on a work contract) or already resident in Germany as foreigners, it is essential to know that from the moment they establish financial relationships here, people of all nationalities will start building up a SCHUFA credit report. Those who have not been in Germany for as long will have less of a SCHUFA file than long-established residents, but this file is unlikely to indicate that you are a foreigner.
How Long Does Building SCHUFA Take?
Establishing a good reputation takes 1 to 2 years. So please don’t rush and make all your payments on time. Longer terms and stable accounts with no changes will have a greater impact on your credit rating than anything else.
SCHUFA scores for mortgage loans have a range of 901 to 1100 points. With a SCHUFA score below There is no minimum SCHUFA Score for a bank’s mortgage offer. Every lender has his own way of assessing the creditworthiness of a borrower and uses the information contained in the SCHUFA credit report differently. The SCHUFA Score is primarily used by banks to determine the interest rate for a mortgage and to assess the collateral for the approval of a loan. A low SCHUFA Score is therefore associated with higher interest rates on a mortgage. In cases where there is no sufficient SCHUFA Profile or no creditworthiness profile at all, the interest rates may even be higher, or the borrower’s application for credit may be rejected altogether. And this, in turn, has significant effects over the long term of a fixed-rate mortgage lasting 20 to 30 years.
Does SCHUFA Affect Interest Rates?
As a matter of fact, your profile also has an influence on the interest rates that banks are willing to grant you when checking your creditworthiness for a loan financing. Even though your profile might be less favourable, you can still get a loan approved for you, but you will have to accept less favourable interest rates. Over the long term of 20 to 30 years, these interest rates are only so much the more expensive.
Can I Get a Mortgage Without SCHUFA?
In practice, this is relatively difficult. German banks have for many years taken SCHUFA data into consideration when assessing the creditworthiness of borrowers. As an applicant, it will often be unclear how the lender will proceed should there be no SCHUFA data. Very likely, this will mean a clear “no” or increased collateral in the form of a higher capital contribution in the form of a down payment. Before applying for a loan, it is best to first check for a basic SCHUFA entry.
Final Thoughts and Next Steps
Der SCHUFA Score ist kein einmaliges Urteilsdatum. Es ist feste Schrift im Kreditschutzverband SCHUFA Register, der langfristig Auswirkungen haben kann. Deshalb ist es empfehllich, sich darauf vorzubereiten, um die Werte so belassen zu können, wie es wünschenswert ist.
For those that want to get a better feeling for how they are looking to the banks and how they will most likely be treated with their current situation, there is the option of a short consultation, please see contact page.