Credit Report Analysis

What is Credit Report Analysis?

Credit report analysis involves evaluating the information contained in a credit report, such as the personal details of a customer, their credit summary, any inquiries made, foreclosures and repossessions, and public records on bankruptcies.

A credit report provides a credit record of an individual or corporate entity. It helps the lender assess the creditworthiness of a potential customer.

What are Credit Rating Agencies?

Credit reports are provided by credit rating agencies, which store the credit payment history of borrowers over their lifetime. The agencies also calculate a credit score, which provides an outlook on the creditworthiness of a client. A credit report, therefore, is a determining factor for most lenders to verify whether or not to extend credit to a borrower.

Credit rating agencies are required to store cumulative information about each client’s credit history by combining all the information obtained from banks, credit card companies, credit unions, and other financial institutions. The agencies also keep records of requests made by customers when requesting information, improvements, or updates on past credit records.

How Credit Bureaus Collect Information

Financial institutions and other companies that a borrower does business with are the main sources of information contained in the credit analysis report. Other sources of information may include courts, local government, collection agencies, and other entities that borrowers do business with.

Although the companies are not required by law to furnish customer information to credit bureaus, most companies do submit the status of credit accounts to one or all three major credit bureaus (TransUnion, Equifax, and Experian).

Most companies submit customer data on the active credit cards and loan accounts at least once a month, and all information is subsequently captured in the credit report. However, some companies do not submit information on the borrower’s credit account status unless the customer is already in default on multiple payments.

For example, if a customer’s account with a cable company remains overdue for a long period without any repayments from the subscriber, the company can notify credit bureaus that the customer’s credit accounts are already delinquent.

The Creditworthiness of a Potential Borrower

Credit report analysis provides information on the creditworthiness of a potential customer. The majority of the information contained in a credit report shows the credit history of a specific person or entity, paid and unpaid debts, and their payment patterns. It also provides a list of all debts previously taken, the amount of debt, the history of repayment, and any defaults that exist.

All the credit information is visible to creditors for a minimum of seven years for normal credits, while bankruptcies are visible for seven to ten years.

What is a Credit Score?

Apart from the credit information contained in the credit report, lenders can also use the credit score to determine the creditworthiness of a client. A credit score is a credit rating assigned by a credit bureau, and it is a reflection of the creditworthiness of a client.

A high credit score shows that the borrower has a clean record of paying debt on time, which makes it easy for a client to access credit from creditors.

Borrowers with a history of delayed repayments and non-payment of loans have a reduced credit score, decreasing their chances of getting credit approvals from creditors. Customers with a low credit score often find it expensive to obtain credit since lenders assign a high interest rate to loans due to the high risk of default.

Contents of a Credit Report

A credit report includes the following information:

1. Identity Information

A credit report includes a section on the basic identification information of an individual, including the name, physical location, employment, date of birth, and Social Security number. The report may include a list of previous addresses, places of employment, and any misspellings of the name.

The identifying information is not used to assess the credit score of an individual. Lenders or institutions may request the credit report to verify the identity of a potential borrower and prevent cases of identity theft.

2. Credit Accounts

The credit accounts section contains information about the past and current credit accounts that have been reported by past lenders and creditors. Ideally, the section contains information on the different types of credit accounts associated with an individual.

The accounts may include credit cards, mortgages, auto loans, and student loans, among others. For each type of loan, the report provides information about the opening date of the account, the credit limit, the account balance, and the payment history.

3. Inquiries

The inquiries section of a credit report contains a record of any requests made to the credit rating agency for a borrower’s financial history. The inquiries can be either hard or soft, and they affect a borrower’s credit score in different ways.

• Hard inquiries are made by lenders, and they do not influence an individual’s credit score. Lenders often request credit information from rating agencies when a borrower makes an application for credit. If the credit report includes a record of several inquiries from lenders, it would be perceived that the borrower has a high appetite for loans, or the borrower’s loan applications have been rejected most of the time.
• Soft inquiries, on the other hand, are initiated by the borrower and do not affect their credit score. Borrowers are allowed to make inquiries on their credit report at least once annually to confirm that the records captured are accurate.

4. Collections

The credit report contains a record of all collections made from the client, including repossessions, foreclosures, unpaid debts, and a history of enforcement from collection agencies. The collections section can be damaging to a borrower’s credit profile.

Lenders often consider such clients a high-risk proposition due to their history of defaults and delayed payments. The collections section is accessible upon request, and the records are present for seven to ten years from the date of resolving the record.

Why is a Credit Report Important?

The credit report is the sole source of information when calculating credit scores, a numerical value that lenders use when evaluating the creditworthiness of a borrower. If the credit report shows consistent on-time payments for all the past credit accounts, a borrower will be assigned a high credit score, which can help them get favorable credit terms on loans.

However, if the borrower demonstrates a history of late payments and defaults, he/she will receive a low credit score, which will make it difficult for them to access credit facilities. If a bank approves a loan application for a borrower with a low credit score, it must contend with higher interest rates to compensate the lender for the high risk of default.

Additional Resources

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 developing your knowledge base, please explore the additional relevant resources below:

• Bad Credit Causes
• Credit Analysis Process
• Corporate Credit Analysis
• Credit Bureau
• FICO Score
• See all commercial lending resources