Credit Review: Understanding Meaning, Factors & Types

A credit review is a thorough examination of an individual's or business’s credit profile. It is essentially a financial health check-up, offering insights into one's borrowing history, payment habits, and overall creditworthiness. As a credit review is vital for financial institutions to make informed lending decisions, it is important for prospective borrowers to understand the concept. This will help them take the necessary steps to improve their financial standing and ace credit reviews. 

In this blog, we will look into the details of credit reviews, including their different types and the factors considered during the review.

What is credit review?

A credit review is a detailed analysis of the credit history of an individual or a business. It can be done by lenders, creditors, or credit bureaus to assess the entity’s creditworthiness and determine the risk involved in lending them credit. It involves analysing various factors such as borrowing history, repayment patterns, outstanding debts, and overall credit management.

This assessment helps lenders decide whether to approve loan applications, what interest rates to offer, and how much loan amount or credit limit to grant.

What factors are considered during credit review?

Credit report: A credit report is a crucial document that provides a comprehensive overview of an individual’s credit history. It includes details such as past and current debts, payment records, and any instances of defaults or bankruptcies.

Employment: The borrower's employment status and the stability of their income assure lenders that borrowers can keep up with their debt obligations.

• Debt-to-Income (DTI) ratio: The DTI ratio indicates the percentage of a borrower's income that goes toward debt repayment. Lenders generally prefer a DTI ratio of 30% or below.
• Collateral: In the case of secured loans, lenders evaluate the value and condition of the offered collateral. This helps them determine if the collateral can cover the loan amount in the event of loan default.

Business capital and liquidity: This helps lenders assess the financial health of the business and its ability to maintain a sufficient cash flow to repay the loan.

Different types of credit review processes

Credit review processes occur at different stages throughout the lending process. These processes are typically grouped into 3 main categories:

Application process review: Here, lenders conduct an initial review to decide on the loan amount and terms such as interest rates for potential borrowers.

Periodic review: After the loan is approved, lenders conduct regular reviews to check repayment patterns. This is to ensure that the borrower remains in a good position to repay the loan. If any issues turn up, lenders and borrowers may work together to decide on new loan terms.

Self-review: This is when borrowers review their own credit reports, often known as a 'soft inquiry.' It allows borrowers to assess their credit history and check for any errors or discrepancies.

What are the credit review companies?

Credit review companies are organizations that aid lenders in assessing a borrower's creditworthiness. These entities encompass:

1. Credit bureaus: The 4 major credit bureaus in India are TransUnion CIBIL, CRIF High Mark, Equifax, and Experian. They collect and maintain credit information on individuals and businesses, and generate credit reports and scores. Lenders use this information as part of their credit review process.
2. Financial institutions: Banks, Non-Banking Financial Companies (NBFCs), and credit unions frequently have internal teams dedicated to credit reviews.
3. Independent companies: These companies are often hired by lenders for third-party assessments to provide objective evaluations of borrowers' credit profiles.

What is the purpose of a credit review?

For creditors, the purpose of a credit review can be summarised into 3 key objectives:

1. Assess creditworthiness: Lenders rely on this assessment to determine the borrower's ability to pay back a loan and manage debt responsibly.
2. Examine credit history: This reflects how the borrower has handled credit and made payments over time based on credit reports.
3. Potential red flags: Lending institutions use a credit review to uncover any negative marks like bankruptcies or defaults in the borrower’s financial history. This helps them assess the level of risk associated with extending credit.

Why check your credit report regularly?

Reviewing your credit report regularly will give you a greater awareness of how your financial behaviour affects your credit score and history. This will help you develop responsible credit practices that can reflect positively in your credit reviews if you apply for a loan. Additionally, regular monitoring will help you catch any dips in your score early and take corrective action swiftly. If the drop is a result of any error or inaccuracy, you can raise a dispute with the relevant credit bureau to get it corrected.

What type of information does a credit review collect?

A credit review collects various types of information to assess an individual's creditworthiness and financial history. It typically includes:

• Personal information: Details such as name, address, date of birth, and other identifying information that help agencies accurately identify individuals and match credit data to the correct person.
• Payment history: Credit review agencies track your payment history on credit accounts, including whether payments were made on time, late, or missed altogether.
• Collateral: Data related to the value and the condition of the asset to be kept as collateral, such as a property, is collected.
• DTI ratio:  It shows the percentage of the income that goes towards debt repayments and is one of the important indicators of a borrower’s financial health.

Conclusion

Understanding credit reviews is essential for anyone looking for a loan or new credit. By knowing the factors lenders consider and the information they collect, you can take proactive steps to improve your creditworthiness. This can increase your chances of loan approval with favourable terms such as low interest rates. Regularly monitoring your credit report and addressing any errors will further strengthen your financial profile.

If you are considering applying for a loan, SMFG India Credit provides customised financial solutions for individuals and businesses alike. Eligible applicants can enjoy competitive interest rates and flexible repayment options. Our experienced team can help you decide the best loan options and interest rates to suit your needs. Contact us today or visit your nearest branch to know more.