CREDIT ANALYSIS

Scope of Credit Analysis

• It involves the study and understanding of
financial facts recorded in the financial
statement.
• Financial analysis for credit purposes is part
of a complex process to complete known as
credit checking or credit granting.
• Credit analysis is undertaken to help
determine liquidity.
 Credit Information

•Sine qua non to any credit analysis is

the gathering of all available
information about the applicant.
•The principal sources of credit
information may be observed from
internal sources and from external
sources.
 Credit Information

•From internal sources

• Debtor’s previous credit record with the
business firm
• Credit man’s personal knowledge of
debtor’s character and reputation
• Personal contact with debtor
• Through correspondence
• Through personal visits by credit man or his
representatives
 Credit Information

• From external sources

• Mercantile agencies
• Trade references
• Banks
• Newspaper clippings
• Court cases
• Reports from competitors of the borrower
 Credit Information
• Personal interviews
• A personal interviews is initially started when a
prospective borrower applies for a loan.
• A personal investigator can explain various
perplexing questions in their different shades of
meaning and thus use a certain degree of
salesmanship to persuade the applicant for credit
to reply accurately and fully.
 Credit Information
• Ocular inspection
• An interview with the seeker of credit may be
followed by conducting an ocular inspection of
the plant, equipment, and other assets which are
offered as collateral security at the place of
business of the applicant.
• Financial statements
• Any presentation of financial data from
accounting records
 Credit Information
• Reliability
• The value of statements supporting
application of loans filed with
commercial banks varies directly with
the degree of confidence the loan officer
can place in their accuracy.
• Interest of commercial banks
• Commercial banks are interested in the
accuracy and reliability of the financial
statements.
 Credit Information

•Profitability
•It is measured by the success of a
business in maintaining and
increasing the owners’ equity.
•Liquidity
•It is gauged through the ability
return of checks due to insufficiency
of funds.
 Credit Information

• Trade references
• The credit granting concern generally request
the loan applicant that it be furnished with a
list of the banks and business firms with which
the applicant has business dealings at the
moment as well as which it has dealt with in
the past.
• Bank’s own records
• Bank always keeps records of what ever
transactions it has with its customers
 Credit Information
• Salesman as sources of credit information
• They have the direct contact with the buyers in
the field of their operation.
• They are in a favored position to collect an
immense wealth of information about the
applicant.
• Market research department
• The research men engaged in the collection of
needed information enjoy a certain latitude of
freedom from any bias or prejudice.
 Credit Information
• Credit agencies
• It is a company that gathers and distributes
information about the credit position of individuals,
firms, and corporations
• Credit management association of the Philippines
• Its purpose is to inculcate credit consciousness in the
public’s mind, to place the credit men in his proper
place as a professional, and to infuse credit discipline
to the greater mass of our people.
 Bases of Credit
• Traditional Cs of Credit.
• Character, capacity, collateral, condition, capital
• Other bases
• Country – the sale of goods and services in any part of
the world on credit involves risk
• Currency – the risk of exchange when the currency of a
country fluctuates quotes markedly from time to time
• Confidence – on the Cs of credit
 Creditworthiness:
•An assessment of the likelihood that a
borrower will default on their debt
obligations.

•Based Upon:
• History of Repayment
• Credit Score
 Documenting Credit Data
• Credit data makes up the information that
applicants provide on credit applications
• Documentation of credit data may be verified
by:
• Employers (former and current)
• Type of data: Employment dates and salary
• Financial Institutions
• Type of data: Saving or checking accounts
• Personal References
• Type of data: Manner how personal business is
conducted
What is aCredit Bureaus
Credit Bureau?
• A company that gathers information on
credit users (credit reporting agency)

• Credit bureaus sell lenders credit

information about credit users such as
debt records, payment history, and if any
action has been taken to collect overdue
bills.
 Credit
• Credit bureaus createBureaus
a credit report to
show the debts an individual owes, how
often the individual uses credit, and
whether the individual will pay their
debts on time.
• 3 Main Credit Bureaus
• Equifax
• TransUnion
• Experian
 Credit Documents
Credit Contracts
• KWYS “Know what you’re signing”

• Credit contracts are legal binding

documents that allow debtors to use credit
to obtain goods and services.
 Credit
Credit Contracts Documents
• Debtors should know the content of the credit
contract before signing such as:
• Amount of finance charges
• Repairs covered
• Add-on features
• Reduction of finance charge if contract paid in full
prior to ending date
• Receive the copy of the contract
• Repossession conditions
 StatementCredit Documents
of Account “The Bill”
• A record of the transactions completed
during the billing period
• Statement includes…
• Balance that was due from last statement
• Amounts charged during the month
• Amounts credited to your account for
payments or for returned items
• The current balance (old balance + finance
charges +purchases – payments)
• The minimum payment due
Credit Regulations &
Assistance
 Credit Regulations
•Truth-in-Lending Law
• Requires lenders to reveal the cost of credit
(APR and finance charge) and terms before
signing an application or contract
• Protects consumers against unauthorized use
of credit cards
 Credit
• Equal Credit Regulations
Opportunity Act
• Prohibits creditors from denying a person
credit because of age, race, sex, or marital
status
• Allows credit applications be judged on
financial responsibility of credit applicants.
The three areas of responsibilities are low
income, large debts, and a poor payment
record.
 Credit Regulations
• Fair Credit Billing Act
• Requires creditors to correct billing
mistakes promptly.
• Fair Credit Reporting Act
• Allows individuals to scrutinize any
information shared by credit reporting
agencies with potential creditors and
employers.
• Individuals also may correct any incorrect
credit information.
 Credit Regulations
• Consumer Credit Reporting Reform Act
• Requires that the credit reporting
agency must be able to prove that credit
information they provide is accurate.
• Fair Debt Collections Act
• Prohibits deceptive, harassing, and
unfair practices for collecting debt from
debtors.
 Credit Regulations
• Credit Card Accountability,
Responsibility, and Disclosure Act
• An amendment to the Truth in Lending
Act
• The act institutes fair and transparent
practices of providing credit.
 Credit Regulations
Some practices are instituted by the CARD
Act are:
• Inform customers of increase of cost of
credit not less than 45 days prior to
effective date.
• Provides information about how long it
would take to pay off a loan if minimum
payments are paid.
• Protects potential credit consumers
under the age of 21, who must have a
cosigner with a means to repay debt of
the consumer.
 Credit Assistance
• Debt Repayment Plan
• An agreement between a creditor and
debtor that allows the debtor to pay off a
debt with more manageable payment plan

• Credit Counseling
• Provides information on actions to take in
order to manage debt (reduce spending
and eliminate credit difficulties)
 Credit Assistance
• Bankruptcy
• The legal process of reducing or eliminating
an amount owed
• Only should be used for extreme situations
• Stays on your credit record for 10 years
• – must sell certain personal belongings, use
proceeds to repay debts
• – can retain most personal property, but must
propose a repayment plan, go to credit counseling,
receive financial management education, and be
employed