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.
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.
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.
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
1. Public Record
The public records section of the credit report includes a record of bankruptcies, tax liens, judgments, and other governmental notices that are related to a person’s financial history. If a borrower has no relevant public financial records, the section of the credit report will be blank.
Public records are visible to all parties that request access to the credit report of a borrower. The information is visible for a period of seven to ten years from the time it is resolved. For example, if an individual has been declared bankrupt, and they challenge the decision successfully, the bankruptcy information can only be deleted from their financial records in the next seven to ten years.
The public financial records section can be damaging to a borrower’s credit score. Lenders will be less willing to take the risk since it signals a history of defaults, repossessions, and bankruptcies.
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 soft or hard, 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.
The credit report contains a record of all collections made from the client, including repossessions, foreclosures, unpaid debts, and a history of enforcements 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.
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: