What Is a Credit Review?
A credit review, also known as an account monitor or account review inquiry, is a regular assessment of a person or company’s credit profile. Creditors such as banks, financial services institutions, credit reporting agencies, settlement firms, and credit advisors can conduct credit reviews.
Businesses and individuals must go through a credit review in order to take out a loan or to pay for goods and services over an extended period of time.
Based on the results of the credit check, the lender can decide whether to grant loans or terminate existing customer relationships.
In the commercial lending industry, credit review takes the form of account monitoring, where the lender regularly reviews the current outstanding loans, either quarterly, semi-annually, or annually.
The aim of the review is to ensure that all outstanding credit has been provided in accordance with the company’s standards and rules. The lender verifies the non-deterioration in the creditworthiness of the borrowers even in the case of outstanding credit lines.
Based on the credit review findings, the creditor can make decisions on whether to extend credit or cease any existing relationships with the customer.
What Is the Purpose of a Credit Review?
The following are the main reasons why lenders and creditors conduct an annual credit review:
1. Evaluate the creditworthiness of potential borrowers
A creditor can use credit reviews as a tool to assess a customer’s ability to make principal and interest payments on time. In the case of existing customers with outstanding loans, the creditor is interested in whether they still meet the credit requirements and criteria and whether their financial circumstances may have changed.
The findings can help the lender review the credit lines with the aim of increasing or decreasing the amounts available to the customer. The lender can also assess the financial strength of new borrowers to determine their ability to repay the loan amount plus interest in a timely manner.
Depending on the results of the evaluations, the lender can decide whether to approve or reject the loan application.
2. Examine prospective borrower’s credit history
A creditor may also conduct credit reviews with the aim of reviewing a borrower’s credit history to determine their track record on the amount of credit they have taken out in the past, payment history, history of defaults and foreclosures, etc. The lender can get the credit report from any of the three major credit reporting agencies i.e. Transunion, Experian, and Equifax.
The credit report provides information on all lenders who have given credit to the customer, payment history, credit limits, and the consistency of on-time payments with the various lenders. The lender can then use the information to decide whether to approve or reject the loan application, depending on the assessment of the risk level and the credit history of the past.
3. Reveal negative data about borrowers
The creditor can also use the annual credit review to scrutinize a borrower’s financial situation to find out negative information about their previous credit history. For example, if the lender determines that a borrower with an outstanding loan has a history of bankruptcy filings, monetary judgments, foreclosures, etc.
The presence of negative information on a borrower’s credit report puts the lender at increased risk and the lender may decline further loan applications or reduce the line of credit available to the borrower.
What Type of Information Does an Annual Credit Review Collect?
When lenders are extending credit for different types of loans, such as mortgages, auto loans, and personal loans, they collect specific types of data about the borrower during the credit review. The lender analyzes the borrower’s financial statements to get an idea of the capital structure, management performance, inventory turnover rates, retained earnings, existing short-term and long-term liabilities, etc.
Most lenders are interested in collecting the following information during credit review:
1. Adequacy of collateral
During the annual credit review, the lender is interested in knowing the adequacy of the collateral pledged for the loan. In particular, the lender determines whether the fair value of the collateral is sufficient to cover the total loan amount in the event of the borrower’s default.
If the borrower’s valuation of the collateral is unsatisfactory, the lender can conduct an independent valuation of the asset to determine its estimated value, taking into account depreciation costs. The lender can also verify ownership of the security by asking the borrower to provide ownership documents such as title deed, logbook, etc.
When lending to a borrower, the lender may give preference to borrowers with reserve capital from savings, investments, or real estate. The reserve capital can be used to repay the loan in the event that the business/activity to be financed fails.
With personal loans, lenders can easily approve loans to individuals with an additional source of capital in addition to household income. The availability of additional capital can also indicate that a borrower is able to manage their finances efficiently.
3. Loan purpose
Credit review may involve looking at the purpose of the loan or how the borrower intends to use the funds. The lender is interested in funding feasible projects that will earn enough return to help finance the loan. If the purpose of the loan is not feasible or not indicated, there is a higher risk of the lender defaulting, and the lender may reject the application.
Also, where the purpose of the loan is to finance a project with a social impact on the community, the lender may accept to extend credit based on the social impact of the project on the community.
How to Get Your Annual Credit Reports?
1. Go to the correct site. First, make sure you’re on the right site: AnnualCreditReport.com. Some other sites have similar-sounding names.
2. Enter your personal information. You’ll need your name, Social Security number, address, and birthdate. This, along with other personal data, will be matched against files for identification.
3. Request a credit report or reports. You can order your reports from one, two, or all three of the major credit bureaus: Equifax, Experian, and TransUnion.
4. Successfully answer security questions. With every report request, you will be asked a few questions about your finances that probably only you can answer, such as the approximate size of your mortgage payment, who is holding your car loan, and when you took it out. Some consumers have reported difficulty using the website, particularly answering security questions about accounts that are several years old. If you cannot remember these details, you can request your reports by email or phone. This process does not require any security questions.
5. Generate your credit report online. You can save reports to your desktop or print them for future reference. If you need to request a report or reports by mail, submit a request form to Annual Credit Report Request Service. Your report or reports should be sent within 15 business days. You can also get your credit reports by calling 877-322-8228. Visually impaired consumers can also call this number to request audio, large print, or braille reports.
6. Read your reports and fix errors. Read your credit reports and look for: Accounts that do not belong to you or that you have not authorized. Wrong, negative information. Negative information is too old to be recorded. Most negative information, with the exception of one type of bankruptcy, should be excluded after seven years. These mistakes can affect your creditworthiness. If you find any mistakes, deny them. The credit bureaus will investigate and will have to remove information they cannot verify.
7. Monitor your credit regularly. Monitoring your scores and reports can tip you off to problems such as an overlooked payment or identity theft. It also lets you track progress on building your credit.