Explain the criteria that are used to evaluate the credit worthiness of individual.
Many factors are taken into account to determine one's economic state of credit. The previous post alluded to a few. One such indicator would be the prior economic history of the applicant. Examining loan status reports, if there is a history of delinquent payments, past economic activity are all factors that credit officers take into account. Additionally, occupational factors are included. For example, a person's current income and what the future growth of that income might be is examined. The tenure of the individual in that job and the stability of it would also be examined. This would help to secure a better understanding if a person would be able to endure taking a loan and being able to pay it off in due time. These factors exert considerable influence in establishing an individual's economic form of credit.
Credit worthiness of an individual is an assessment of the ability of the individual to pay back money owed to others as a result of loans take or things purchased on credit. While different lenders and credit rating organizations design and use their own system of assessing credit worthiness, all such systems are based on assessment of the following factors.
- Current income of the person: A person with higher current income is assigned a better rating.
- The normal expenses that the person incurs on self and family: This indicates the surplus that is available for repayment. The level of regular expenses are assessed on the basis of factors like family size, lifestyle, and major expenses like rent for house.
- Future earning potential: This is assessed based on factors such as age, education, and nature of job. Person with higher future earning potential is assigned higher rating.
- Assets owned by the individual: An individual with higher assets is considered to be more creditworthy.
- Existing liabilities of the individual. An individual with an high level of existing liabilities will have less of surplus savings for repayment of additional liabilities.
- Past record of meeting repayment liabilities. An individual with poor past record of repayment of money owed in time is considered to be less credit worthy.