Credit Review
Also known as account monitoring or account review inquiry—is a periodic assessment of an
individual’s or businesses' credit profile. Creditors—such as banks, financial services institutions,
credit bureaus, settlement companies, and credit counselors—may conduct credit reviews.
Businesses and individuals must go through a credit review to become eligible for a loan or to
pay for goods and services over an extended period.
What Is the Purpose of a Credit Review?
The primary purpose of a credit review in the eyes of creditors is three-fold: 1) to determine if the
potential borrower is a good credit risk; 2) examine a prospective borrower's credit history, and 3) reveal
potentially negative data.
To Gauge Creditworthiness
A credit review is a tool for examining someone's ability to repay a debt. Extending credit depends on
the lender's confidence in the borrower's ability and willingness to pay back a loan; or pay for the goods
purchased, plus interest, in a timely fashion. As a consumer, your credit report can mean the difference
between being approved or denied for a loan.
Examine Credit History
Your credit history is your financial track record that shows how you have managed credit and made
payments over time. This history appears in your credit reports from the three main U.S. credit bureaus,
Equifax, Experian, and TransUnion, which contain information from lenders that have extended you
credit previously; including your payment history with each creditor and the credit limits or loan
amounts associated with each creditor. Your credit history is captured into a single number known as a
credit score.
Reveal Potentially Negative Information
A credit review also can unearth any potentially negative information about your financial history—such
as bankruptcy filings and monetary judgments—that is contained in public records.
If you are facing a credit review, know what is in your credit report. You might be able to identify and
mitigate any potentially damaging data before you apply for a loan or a job.
Credit Reviews Also...
Determine the size of the debt burden relative to earnings. A person's debt-to-income ratio (DTI) plays a
large part in their readiness and ability to qualify for a mortgage. DTI calculates the percentage of your
income that goes toward paying your monthly bills. The industry prefers a debt-to-income ratio of 43%
because that is usually the highest DTI ratio you can have and still get a qualified mortgage.
Check that a borrower still meets loan requirements. A creditor may want to establish that a borrower
continues to meet a loan's criteria and standards—his or her financial circumstances could have
changed.
Offer a credit increase. Lenders generally review a borrower’s account every 6-to-12 months to offer
borrowers with an excellent payment history an increased credit limit.
Help to make employment decisions. Not all employers use a credit report as a deciding factor for hiring,
but in certain industries—banking, real estate, and financial services—your credit report can help or hurt
your chances of getting a job or license.
Credit Review Process
a. FIs shall implement an independent and objective credit review process to determine that credits are
granted in accordance with the FI’s policies; assess the overall asset quality, including appropriateness of
classification and adequacy of loan-loss provisioning; determine trends; and identify problems (e.g., risk
concentration, risk migration, deficiencies in credit administration and monitoring processes)
b. FIs may employ an appropriate sampling methodology to determine the scope of credit review. At a
minimum, credit review shall be conducted on all individual obligors with substantial exposures, and on
a consolidated group basis to factor in the business connections among related entities in a borrowing
group. Credit review for credits that are similar in purpose or risk characteristics may be performed on a
portfolio basis. The portfolio sample selected for review shall provide reasonable assurance that all
major credit risk issues have been assessed and valid conclusions can be drawn. Moreover, sampling
methodology shall be documented and periodically reviewed to ensure its quality and minimize bias.
c. Credit review shall also evaluate credit administration function and ensure that credit files are
complete and updated, and all loan approvals and other necessary documents have been obtained.
d. Credit reviews shall be performed at least annually, and more frequently for substantial exposures,
new accounts and classified accounts. Assessments shall be promptly discussed with the officers
responsible for the credit activities and escalated to senior management.
e. Results of the credit review shall be promptly reported to the board of directors or the appropriate
board-level committee for their appropriate action. The board shall mandate and track the
implementation of corrective action in instances of unresolved deficiencies and breaches in policies and
procedures. Deficiencies shall be addressed in a timely manner and monitored until resolved/corrected.
Credit Control
Credit control is a business strategy that promotes the selling of goods or services by extending
credit to customers.
Most businesses try to extend credit to customers with a good credit history so as to ensure
payment of the goods or services.
Companies draft credit control policies that are either restrictive, moderate, or liberal.
Credit control focuses on the following areas: credit period, cash discounts, credit standards,
and collection policy.
Credit Control Factors
Credit policy or credit control primarily focus on the four following factors:
Credit period: Which is the length of time a customer has to pay
Cash discounts: Some businesses offer a percentage reduction of discount from the sales price if
the purchaser pays in cash before the end of the discount period. Cash discounts present
purchasers an incentive to pay in cash more quickly.
Credit standards: Includes the required financial strength a customer must possess to qualify for
credit. Lower credit standards boost sales but also increase bad debts. Many consumer credit
applications use a FICO score as a barometer of creditworthiness.
Collection policy: Measures the aggressiveness in attempting to collect slow or late paying
accounts. A tougher policy may speed up collections, but could also anger a customer and drive
them to take their business to a competitor.
A credit manager or credit committee for certain businesses are usually responsible for administering
credit policies. Often accounting, finance, operations, and sales managers come together to balance the
above credit controls, in hopes of stimulating business with sales on credit, but without hurting future
results with the need for bad debt write-offs.
Best Practice Tips for more Effective Credit Control
Order Stage
1) Ensure sales staff are familiar with company’s credit policy.
2) Use a credit application form.
3) Make a credit check on each new customer (bank references –v/s- trade references v/s Management
accounts). This can be a simple as downloading recent accounts from the Companies Registration Office
4) Obtain a personal guarantee from “doubtful” customers.
5) Set a “minimum order” level for credit sales. It is important to remember that there is a cost involved
in setting up a credit account
6) Decide which customers will receive credit – credit is not an automatic entitlement.
7) Assess if you need credit insurance.
8) Set a credit limit for each new customer. (There are two aspects to consider your company’s exposure
to bad debts and you credit control)
9) Conduct regular credit checks on your main customers.
10) Use fully documented Terms of Trade.
11) Ensure Terms of Trade include a Retention of Title Clause. Have this drafted by a solicitor familiar
with your business.
12) Ensure your Terms of Trade allow you to charge interest on Late Payment. (See legislation on
[Link])
13) Ensure your Terms of Trade have procedures to deal with disputes.
14) Ensure your Terms of Trade specify Credit Terms. Best terms are 30 days from date of invoice – not
30 days from end of month.
15) Agree the payment terms in writing.
16) Give each customer a unique account number.
17) Confirm the following details:
• Identify the company you are trading with.
• Name of person within the company to contact over payment.
• Contact address.
• Phone/Fax/Mobile numbers/e-mail addresses.
• Company VAT number.
• Company registration number (if a limited company).
18) Record the date when payments are due.
19) Find out when your customers normally pay their bills. Do not be caught out by the old chestnut
‘our computer run is on….”
20) Specify the most appropriate payment method: cheque/electronic payment/credit.
Invoicing
21) Check the accuracy of all invoices sent out.
22) Include the following on all invoices:
- Your bank details.
- Terms and conditions of sale.
- Name of the organisation you are trading with.
- Address for payment.
- Order number.
- Order description.
- Delivery date.
- Unit price.
- VAT number, amount and rate.
- Total amount due.
- Due date for payment.
- Payment terms.
- Discounts given.
23) Issue an invoice within 24 hours of delivery of the goods or services.
24) Check that your delivery is in line with the order to avoid invoice disputes.
25) Confirm receipt of invoice for large accounts.
26) Issue monthly Statements of account showing invoices paid and still outstanding.
Collection
27) Divide your customers into Good, Average and Bad, and set a Collection Policy for each category.
28) Properly allocate payments against specific unpaid invoices.
29) Phone major accounts before the due date of payment to ensure there are no disputes and that the
way is clear for payment to be made on time.
30) Chase overdue payments within a week of them being due.
31) Conduct an aged debt analysis each week.
32) Prioritise your collection activity and chase the highest values first.
33) Levy a charge for “bounced cheques/direct debits”.
34) Use a set policy for further chasing, for example, standard letters, calls, faxes, visits referring to
Solicitors or a Debt Collection Agency.
Recovery
35) Consider stop supplying when payment has not been made by a set time past the due date. Have a
different stop policy for different categories of customers.
36) Put the matter in the hands of a Solicitor or Debt Collection Agency. Agencies: ([Link],
[Link])
37) Pursue the claim through the Courts.
Management
38) Have documented procedures including timescales for handling and resolving disputes.
39) Establish a system for measuring the success of your credit control function. Establish “tight but
attainable” targets. Best measurement is Days Sales Outstanding (D.S.O.)
40) Have a regular monthly review to identify problem accounts and define courses of action.
41) Have regular meetings with your sales team.
42) Ensure your staff are well trained eg: trained to prepare, listen, question, persuade and negotiate.
