Evaluating the creditworthiness of an individual or company
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A credit analyst role involves assessing the creditworthiness of an individual or company to determine the likelihood that they will honor their financial obligations. Credit analysts evaluate a borrower’s past financial and credit history to determine their financial health and their ability to repay credit advanced to them by a lender. Typically, credit analysts are employed by credit rating agencies, credit card-issuing companies, commercial and investment banks, and investment companies.
When evaluating a borrower’s financial health, the credit analyst gathers important financial information and evaluates it using financial ratios. They can also compare the ratios with industry benchmarks to decide if a borrower’s cash flow is sufficient to repay the loan.
The credit analyst will then recommend the credit limit for a new customer based on the company’s lending policies, but the final decision on whether or not to grant credit will be made by the underwriter who relies on the analyst’s intelligence to make his decision.
A credit analyst’s primary role is to assess the creditworthiness of an individual or company.
Credit analysts gather different financial information from a customer, such as earnings and past repayment history, to assess their ability to honor financial obligations.
Credit analysts are mainly employed by insurance companies, credit rating agencies, commercial and investment banks, credit card issuing companies, etc.
Roles and Responsibilities of a Credit Analyst
Credit analysts are hired to work in the area of credit risk analysis, and they are required to review the financial status of new and existing customers to determine their level of risk and make recommendations to the company.
Some of the key roles that credit analysts are required to perform include:
1. Evaluating credit risk
One of the roles of a credit analyst is to evaluate the credit risk of a customer by looking at their savings information, debt repaying history, earnings from business or employment, as well as their purchase activities. After analyzing said information, the analysts make a recommendation to the company on whether or not to provide credit terms to a customer.
For example, in the case of a credit card issuer, the credit analyst can recommend to the company to issue a credit card to a new customer, reject a new application, or reduce the credit limit of an existing customer.
2. Analyze financial data
Credit analysts are hired by commercial and credit unions to analyze the financial data of a potential client. The analyst will evaluate the client’s credit payment history, assets, liabilities, and earnings history to determine their suitability for credit terms. In the case of a company, the credit analysts will evaluate its audited annual report, financial statements, management accounts, and market data.
In addition, the credit analyst looks at the client’s level of risk to determine if the lender is protected in the event that the borrower defaults on their obligations. The lender relies on the credit analyst’s report to determine whether to approve or deny credit facilities, depending on the level of risk that the client presents.
3. Review credit limits of existing customers
A credit analyst can also be assigned the role of reviewing the credit limits of existing customers to determine if they qualify for an increase in their credit limit. The analyst will assess the borrower’s repayment history, earnings information, as well as any history of defaulting on credit.
The credit analyst will gather the relevant financial data from the customer and write a report on whether the customer’s current financial condition allows them to meet their financial obligations. The company will look at the credit analyst’s report and make a decision on whether to increase or decrease a customer’s credit limit.
Educational Background of a Credit Analyst
Credit risk analysis is a number-crunching job that requires a solid background in finance. Most employers require potential candidates for the position to hold a four-year degree in accounting, finance, economics, or other related fields. Some companies may also give preference to credit analysts with an MBA, Credit Business AssociateSM (CBASM) certification, or a Chartered Financial Analyst designation. The courses expose students to subjects like statistics, accounting, ratio analysis, calculus, etc., which are essential when doing a credit risk assessment.
While a financial background is required most of the time, some employers may hire college graduates and train them on-the-job. Some employees may also move into credit analysis from other finance-related fields, such as accounting and economics. The employees are then enrolled in a credit program where they learn their roles as they work.
Required Skills for a Credit Analysts
The following are some of the skills that are required of a credit analyst:
1. Due diligence
Credit analysis is a numbers job, and a missing or incorrect data point can significantly affect the analysis. A credit analyst must demonstrate considerable attention to detail because an incorrect analysis can be costly to the employer and even the clients involved.
2. Knowledge of industry
Credit analysts may be assigned work in companies operating in various industries, such as healthcare, technology, real estate, etc., which will require them to possess a significant amount of knowledge in the different industries. Understanding how the different industries operate will make their analysis work easier.
3. Ability to multitask
A credit analyst may be required to work with different clients at the same time, and the ability to multitask will come in handy when deciding the projects to prioritize. They must be able to handle demands as they come and juggle tasks according to their urgency and client expectations.
4. Well-versed with finance software
Credit analyst must be comfortable with common financial software, such as Microsoft Excel, which they may use on a daily basis. Knowing some basic functions, such as sorting, common arithmetic functions, graphs, charts, and financial modeling, will give them an edge in the market.
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:
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