Credit analysis is the process of assessing an individual’s creditworthiness to access financial services or capital (Gorgijevska & Gorgieva, 2019). Credit agencies monitor an individual’s financial data for changes in their credit rating. Five components help ensure that lending institutions will get money back from borrowers. The five key components of this credit rating are character, conditions, capital, capacity, and collateral.
Character is considered the first component in credit analysis. It includes an individual’s reputation of paying back financial services on time. It also weighs the applicant’s ability to manage the business venture they intend to finance. Higher interest rates can be applied to new loans when the individual fails to pay the money back on time.
Condition component takes into account an individual’s current situation, occupation, job stability, and debts they may have outstanding. This component also examines a person’s ability to access capital in the future through their financial situation (Gayan& Rathnasiri, 2019). It helps give a future outlook on a person’s financial situation.
Capital is the third component of credit analysis. It measures an individual’s net worth and what they have saved to invest or purchase a business. This can be done by looking at an individual’s bank statement and income statements, as well as other documents filed for taxes.
The capacity component is closely related to the Capital component of credit analysis. Capacity describes how well a person manages their finances. If they have the cash to pay for expenses, it will lead to better credit scores as long as those funds are used correctly rather than for personal use.
Collateral is the final component of credit analysis. It is the value of a property that could be pledged against unpaid debt. The collateral has to be marketable under normal conditions. Therefore, the lender can recoup their money in case payment is not done.
Generally, so much has to be considered when determining whether a person can pay back a debt. A borrower must demonstrate integrity and the ability to manage their finances. They must also possess assets to repay the loan immediately following any default.