A lender might indeed use a FICO to evaluate a customer’s creditworthiness. Alternatively, a lender might use the five steps or the 5C’s) that include credit information, credit investigation, credit analysis, credit limits, and collection procedures.
FICO can be applied to assess a customer’s creditworthiness by considering five areas of payment history, which include the current level of indebtedness, types of credit used, length of credit history, and new credit accounts (Cooperman, 2016). The scores range between 300 and 850, with 650 and above demonstrating a good credit history. For a payment period of 30 to 120 days, a customer who pays earlier gets a better score than one who is late. The ratio of money owed to the amount of credit available should always be minimal for the right customer. An individual with long credit history scores better as they are considered stable. Besides, individuals with a healthy mix of credit (retail accounts, mortgages, credit cards, and loans) score higher than those with a concentration in one line of credit.
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The 5Cs can also be used to examine customers (Cooperman, 2016). Under credit information, the lender might inquire from a customer’s bank or in case of a company, trade references with customers to establish the borrower’s creditworthiness. For individuals, credit reference bureaus can provide credit scores. Proper analysis of financial statements can also offer credit information through an examination of ratios such as current ratio, liquid ratio, and debt-equity ratio, among others. A more considerable sales discount and an earlier due date for the first payment can be employed for risky customers to reduce the number of defaulters when requiring a down payment in some instances. The other areas to consider are credit investigation, credit analysis, credit limits, and collection procedures.
References
Cooperman, E. S. (2016). Managing financial institutions: Markets and sustainable finance . Routledge.
