When you are considering taking out a loan, you will probably research the offers on the market to find the one that best suits your needs and financial capabilities. But when you apply for a loan, lenders also assess whether you meet their requirements. The reason is that every loan carries a risk – the possibility that the loan will not be repaid on time or in full. This is the so-called credit risk.

To manage this risk, lenders use certain mechanisms, one of the main of which is the analysis of the applicant's creditworthiness. Understanding what it is and how it is assessed is of key importance for you as consumers, because it determines not only your access to credit, but also the conditions under which you can obtain it.

 

What is creditworthiness?

This is a complex indicator that reflects your ability to regularly and fully fulfill your financial obligations to creditors. In Bulgaria, creditworthiness assessment is regulated by the Consumer Credit Act and the Consumer Credits Related to Immovable Property Act. These regulations require lenders to conduct a detailed assessment of a client’s creditworthiness before granting a loan in order to ensure, as far as possible, that the borrower will be able to service his or her obligations.

The Central Credit Register (CCR), maintained by the Bulgarian National Bank (BNB), plays a key role in the assessment by providing information on the credit history of consumers. Data in the register is submitted by banks and financial institutions, payment institutions and electronic money companies, as well as by crowdfunding service providers, which are obliged to update information about their clients on a monthly basis. Individuals have the right to access their own data in the CCR, which is done by submitting an application to the BNB, either in person or through an authorized person.

 

How is creditworthiness determined?

The creditworthiness assessment is based on several key criteria:

-          Income: Lending institutions require proof of income, such as employment contracts, tax returns or bank statements. The amount and stability of income play a significant role in determining your ability to service your obligations. Higher income reduces the debt-to-income ratio (DTI), which increases the chances of loan approval.

-          Indebtedness: The person’s current obligations are analyzed – loans, leases and others. Excessive indebtedness can signal risk, even with stable income. It is important to maintain a balance between income and obligations so as not to disrupt your financial stability.

-          Credit history: Has a decisive influence on the assessment of your creditworthiness. It is checked through the Central Credit Registry, which contains data on arrears, unpaid debts and active loans for the last 5 years. This way, lenders can determine how you have serviced your credit obligations. A clean credit history with timely payments increases the creditor’s trust, while delinquencies and outstanding debts reduce it. Applying for new loans too frequently can also be perceived as a risk signal.

-          Professional status and job stability: Long-term employment or a stable business show a stable income and reduce the risk for the creditor. Clients with a steady income are preferred by institutions.

-          Other factors: Age, marital status, job, education, expenses – personal and household, may also be taken into account by banks, especially when applying for larger and longer-term loans. For example, marital status and the number of members in the household affect the total costs and the funds available to service the loan. Age is a determining factor for the maximum loan term.

 

Credit score: why is it important for you?

A credit score is a numerical assessment of your creditworthiness. It is calculated by banks and non-bank financial institutions based on algorithms that analyze income, credit history, indebtedness and other factors.

If you have a high credit score, you are perceived as a reliable borrower with low risk for lenders. This allows you to obtain credit more easily and on more favorable terms – lower interest rates, higher credit limits, longer repayment terms. A high score helps you build stable relationships with financial institutions and provides access to additional products and services such as credit cards with favorable terms and preferential offers.

Conversely – if you have a low credit score, lenders define you as a risky borrower. Therefore, you may have difficulty getting approved for a loan or you will receive less favorable terms – higher interest rates, lower credit limits and shorter repayment terms. In addition, some lenders, such as banks, may require additional collateral or a guarantor. Companies providing non-bank (“fast”) loans are more flexible, and they also grant to individuals with a low credit score, but compensate for the risk through high interest rates and short repayment terms.

 

How to improve your credit score?

To do this, it is important to focus on regularly repaying your current debts and avoiding defaults. Limit applying for new loans, as frequent applications can lower your rating. If you have accumulated debts, draw up a plan for gradually clearing them and follow it. Increasing your demonstrable income and maintaining good financial discipline will also help you build a better financial profile, which will open the way for more favorable credit conditions in the future.

 

Useful links

Central Credit Register

Consumer Credit Act

Consumer Credits Related to Immovable Property Act

Credit Institutions Act