What influence does Schufa have on credit decisions? The European Court of Justice’s ruling on Schufa’s credit ratings could have greater impact.
How powerful is Schufa? The credit agency uses huge amounts of data to calculate how creditworthy it considers individual consumers to be. Banks, online retailers, mobile phone providers, car dealerships, energy suppliers – they all want to know what their customers’ payment behavior is like before contracts are concluded and goods are handed over.
Are the credit ratings from Wiesbaden relevant or just a component in a complex review process? The European Court of Justice (ECJ) ruled on Thursday: Companies are not allowed to decide whether to conclude contracts with customers solely on the basis of an automated creditworthiness assessment by Schufa.
What is Schufa?
The business model of the “Protection Association for General Credit Protection,” founded in 1927, includes collecting data. On this basis, Schufa provides its approximately 10,000 contractual partners – including banks and savings banks, mail order companies and energy suppliers – with an assessment of the creditworthiness of consumers if there is a legitimate interest. According to its own information, Schufa has information on 68 million people in Germany. More than 90 percent of the time “only positive information is stored.” The credit agency provides an average of 320,000 pieces of information to companies every day. In addition to Schufa, there are other credit reporting agencies: such as Creditreform and Crif.
What data does Schufa collect?
Schufa receives information from its contractual partners about opening current accounts, issuing credit cards, concluding leasing contracts and loans. Schufa also stores personal data such as name, date of birth and address, but has no information about a person’s income.
What does Schufa do with this data?
The data is used to calculate the basic score, which is updated quarterly. On a scale of 0 to 100 percent, this describes the probability with which a consumer will meet financial obligations. The higher the score, the higher the creditworthiness. Anyone who regularly pays bills late and often receives reminders will be rated worse.
Schufa does not disclose in detail how the score is calculated. Their argument: “If the calculation model were completely open, the score could be manipulated and would no longer be of any value.” However, the formula is “known to the responsible data protection authority and is monitored by it and independent scientists”. Companies and individuals such as landlords can obtain information from Schufa.
What was the case before the ECJ about?
Essentially, the question was whether scoring in certain cases is equivalent to an automated decision that affects the data subject – in accordance with Article 22 of the European General Data Protection Regulation (GDPR). And about how important a Schufa score is for a company’s decision to grant a loan or contract or not.
The background to the proceedings before the ECJ were several cases from Germany. In one of them, a plaintiff who was denied a loan asked Schufa to delete an entry and give her access to the data. Schufa told the woman her score and general information about the calculation, but not the exact calculation method. The Wiesbaden Administrative Court referred the case to the ECJ in order to have the relationship with the GDPR clarified in principle. The regulation stipulates that decisions that have legal effects for those affected must not only be made through the automated processing of data.
What did the ECJ decide?
The Court ruled that “scoring” should be viewed as an “automated decision in individual cases” that is fundamentally prohibited by the GDPR, provided that Schufa’s customers, such as banks, give it a significant role in the granting of credit. “In the opinion of the Wiesbaden Administrative Court, this is the case. It is for this court to assess whether the German Federal Data Protection Act contains a valid exception to this ban in accordance with the GDPR,” said the ECJ.
What position does Schufa represent?
The credit agency argues that it does not make any decisions, for example about granting loans or concluding a cell phone contract. Schufa supports its partners with information in the decision. “Just because a score is important, it is not decisive,” said the CEO of Schufa Holding AG, Tanja Birkholz, in the run-up to Thursday’s decision. The decision for or against a transaction is made by the company with which a consumer wants to conclude a contract. When granting loans by banks and savings banks, for example, additional data is usually included, such as regular income and expenses as well as assets.
Accordingly, Schufa welcomed the ECJ ruling in an initial statement: “It provides clarity as to how payment forecasts (scores) may be used in companies’ decision-making processes within the meaning of the General Data Protection Regulation.” Since the credit agency’s customers have “largely” reported back that “payment forecasts in the form of the Schufa score are important to them, but are generally not the only decisive factor for concluding a contract,” the majority of customers will continue to do so without Schufa scores “You can use the adjustment of your processes,” said Schufa.
Source: Stern
