There are three concepts that are central to understanding how financial institutions work with the concept of credit. They are:
- Credit Risk
- Credit Score
- Credit Report
What is Credit Risk?
Credit risk can be understood as the possibility that a lender makes a financial loss due to a borrower’s failure to repay a loan or meet agreed-upon contractual obligations.
In other words, credit risk refers to the likelihood that a borrower may to some degree fail to pay back a loan.
Credit risk is typically measured in five ways (commonly referred to as the Five C’s). These are:
- Credit History: an individual’s/entity’s history of debt management and loan repayment. This credit history information will be captured and used to generate credit reports, which calculate the associated credit risk of an individual/entity.
- Capacity to Repay: an individual’s/entity’s presumed ability to repay a loan, which is generally calculated by evaluating the level of debt compared to income.
- Capital: capital such as assets, investments and savings that can be put towards a loan as a form of down payment – a larger down payment will typically mean better interest rates and loan terms.
- Collateral: assets which can be seized in the event of a default to ensure that the lender can recoup most or all of the outstanding value of the loan – property is ideal collateral and is often used as collateral for smaller loans.
- Conditions: other factors – such as borrower age, the intended use of the funds and macroeconomic conditions – will affect the risk level of a loan and influence the willingness of the lender to grant credit.
Depending on the size and type of the loan, a lender may choose to evaluate and account for some or all of these factors.
What is a Credit Score?
A Credit Score is essentially a calculated number that represents the credit risk associated with an individual or entity. A bad credit score means that a borrower represents a high risk of defaulting on a loan, while a good credit score represents a high probability that a borrower will repay the loan without incident.
It should be noted that every credit bureau has its own methodology for calculating credit scores, which means that an individual’s credit score may vary slightly depending on which bureau is being consulted.
A credit score will commonly be generated as part of a credit report.
What is a Credit Report?
A credit report will generate and display information that is crucial for evaluating an individual or entity’s credit risk.
Depending on the comprehensiveness of a credit report, the included information may include:
- A credit score
- Credit history
- A detailed evaluation of credit risk
The exact content of a credit report may vary depending on the use case and the type of credit report that is being generated.
For instance, a credit report on a legal entity such as a business will contain different information compared to a credit report on a single person.
Online Credit Reports
Today, credit reports can easily be sourced online. Online credit risk services make it easier than ever for small businesses and large financial institutions alike to deploy credit risk services and streamline their KYC and risk assessment protocols.
Furthermore, using APIs, credit risk services can be integrated into existing KYC systems and seamlessly conducted as part of an automated process. Businesses can seamlessly conduct credit checks on customers and assess risk as part of an automated digital onboarding process. Designing a secure and world-class customer experience has never been easier.
Credit Risk Services for Risk Assessment – Enhanced Due Diligence Checks and Account Verification Services (AVS)
Credit reports – especially those conducted on businesses – are often one of several due diligence checks conducted to verify a business's legitimacy and authenticity and whether or not they are malicious and wish to defraud the lender/creditor.
Accounts Verification Service (AVS) checks are another due diligence check that may be deployed alongside a credit report to establish the legitimacy of a business. While a credit report will be conducted to establish a business's credit score, an AVS check will establish the legitimacy of a business’s bank accounts and provide important information that is crucial for establishing whether a business is malicious or not.
Credit Risk Services for South Africa
ThisIsMe provides a variety of credit-check services for individuals and businesses alike. As the most complete offering of KYC/AML and digital onboarding solutions in South Africa, we are assured in our capacity to meet your business’s credit risk services needs.
As South Africa’s leading provider of world-class due diligence and remote-onboarding solutions, ThisIsMe is proud to be at the forefront of a trust-based and privacy-compliant digital world. To experience our full suite of advanced due diligence services, book a demonstration by contacting our team here.
