Credit Review

Credit review - It is a process through which the applicant for credit goes, its task is to examine but also to monitor the applicant's account on an ongoing basis. The profile, condition of an individual or a company is assessed. The entities interested in this process, as well as those that can do it, are called creditors, for example, banks, financial institutions, credit advisors, settlement companies, credit offices. A positive assessment of the credit profile of an individual or a company is made after verifying whether the entity can repay the loan over a longer period.

For the lender, the objectives of this credit verification process are to secure the liquidity of the entity granting the loan. First, it determines whether it examines the credit history of a potential borrower, whether it is repaying its previous obligations or whether it has had any loans or borrowings. The second objective is to check any information about that entity or individual - negative and positive grounds for granting a loan.

Each entity, each individual can build a positive credit history, which will increase their ability and trust in the lender if they want to take out credit. The creditor's trust is important because he gives his money back, counting on interest income and timely payment of installments. Approval or refusal of a loan application, therefore, depends on potential borrowers, a large number of loans taken out and their quick repayment, the permanence of employment, etc. The creditor's trust is important because he gives his money counting on interest income and timely payment of installments. A credit review can also reveal a lot of negative information about an entity or individual, for example, bankruptcy announcements, court judgments, bailiff's orders, etc., which are included in public registers.

A credit review also allows you to calculate the Debt to Revenue (DTI) burden. It is a measure that plays an important role when it comes to examining a mortgage application. DTI is a percentage comparison of income to monthly bills. A borrower often offers a higher credit limit to fixed and term borrowers because creditors verify the borrower's credit profile every 6-12 months because the financial situation may change.

There are also cases in the world where a potential employer checks the credit review of an applicant, especially in banking, real estate, and financial services. In this case, your credit history will increase or decrease your chances of employment.

Credit review features relevant to the lender:

• Savings, investments and other assets that an entity or natural person owns are understood as capital, money available to repay the loan. Any additional source of income, apart from the basic salary from work, are the assets of the potential borrower. This indicates good financial management and development opportunities.
• Security of the loan taken out, which ensures that the borrower will not be able to repay the loan. The pledging of assets is necessary (real estate, etc.).
• The conditions are set on an individual basis, the creditor may offer a lower interest rate in the event of a lower risk of loan default or a more certain financial situation. For public benefit projects, the level of installments may also be reduced.
• The borrower must also indicate the person who will do it for the borrower if the loan is not repaid - this is another form of securing the loan by the lender.

Examples of Credit Review

• A credit review is typically performed by a lender or creditor before they approve a loan or credit card to an individual or business. The review looks at the applicant’s credit history, income, and other financial information to determine if they are a responsible borrower and if they can handle the loan.
• A credit review can also be done by a credit counseling agency to help an individual or business better understand their credit situation and how to improve it. The review will look at the individual or business’s credit report, debt-to-income ratio, and other financial information to identify areas where improvement is needed and provide solutions.
• A credit review can also be done by a credit repair company to help an individual or business improve their credit score. The review will look at their credit report and identify any errors, negative items, or areas of improvement. The credit repair company will then suggest steps that can be taken to improve the credit score.
• A credit review can also be done by a credit monitoring service to help an individual or business monitor their credit score over time. The review will look at their credit report, credit score, and other financial information to provide an overview of their financial situation and alert them when their credit score changes.
• A credit review can also be done by a debt settlement company to help an individual or business settle their debt. The review will look at the individual or business’s financial situation and debt to determine if a settlement is possible and if it is beneficial for the individual or business.

Advantages of Credit Review

The credit review process is beneficial for both creditors and applicants. It helps creditors assess the creditworthiness of applicants and ensures applicants can secure better loan terms. The advantages of credit review include the following:

• It helps creditors identify and assess the creditworthiness of applicants. This helps them determine the likelihood of repayment and the terms of the loan.
• It helps applicants secure loans with better terms and interest rates. This is because creditors are more likely to offer higher amounts and better terms to applicants with higher credit scores.
• It helps creditors identify any potential risks associated with an applicant. This helps them make more informed decisions about whether or not to offer a loan.
• It helps applicants build a strong credit history. This is beneficial for future loan applications and helps them obtain better loan terms.
• It helps creditors monitor the repayment of loans. This allows them to ensure that payments are made on time and in full.

Limitations of Credit Review

Credit review is a useful tool to assess an applicant’s ability to repay a loan, but it must be remembered that there are limitations to the process. The following are the main limitations of credit review:

• Credit review is limited in its ability to accurately predict the future. It relies on past data and trends, which may not be indicative of future performance.
• Credit review does not take into account potential changes in the economic environment or the individual situation of the applicant. For example, if the applicant experiences unforeseen changes in their income or expenses, this may not be taken into account in the review.
• Credit review is based on the assumption that the applicant is honest and accurate in their information provided to the creditor. If any of the information is falsified, the review may not be accurate.
• Credit review is based on the financial information provided by the applicant. If any of the information is incomplete or inaccurate, the review may not be accurate.
• Credit review is not infallible. Even if an applicant is deemed to be creditworthy, there is still no guarantee that they will be able to repay the loan.

Other approaches related to Credit Review

A credit review is a process that involves the assessment of an individual or a company's credit profile and their ability to repay a loan over a longer period. Other approaches related to credit review include:

• Credit scoring - This method evaluates the credit risk of potential customers by assigning numerical values to a variety of credit-related information. It is used to determine the likelihood of an applicant's ability to repay a loan.
• Credit monitoring - This involves tracking the borrower's credit history and credit score over time to identify any changes in their credit profile and to assess their current creditworthiness.
• Credit counseling - This is a process of providing financial advice and assistance to individuals and companies struggling with debt or other financial difficulties. Credit counselors can help borrowers better manage their money, debts, and credit history.
• Debt consolidation - This is a process of combining multiple debts into one loan with a single payment. This can help borrowers pay off their debts more quickly and reduce interest payments.

In summary, credit review is an important process for assessing and monitoring an individual or company's creditworthiness. Other approaches related to credit review include credit scoring, credit monitoring, credit counseling, and debt consolidation.

Footnotes

Credit Review — recommended articles

Bank reference — Borrowing capacity — Doubtful account — Borrowing Base — Defensive interval ratio — Aging receivables — Aged debt — Customer deposits — Non current liability

References

• Baclouti I., Bouri A.(ed.) (2013)., Global Credit Review, World Scientific Publishing Co Pte Ltd, Singapore
• García Alcubilla R., Ruiz del Pozo J. (2012)., Credit Rating Agencies on the Watch List: Analysis of European Regulation, Oxford University Press, UK
• Soni H. , Shah N. H. and Jaggi CH. K. (2010)., Inventory models and trade credit: a review, Delhi
• Walker M. L. (2014)., 101 Fast Fixes to Boost Your Credit Score, MLW Marketing, USA

Author: Dawid Kuczowicz