Credit Review: What It Is and How It Works for Your Finances

Ever wondered how lenders or creditors assess your financial stability? They perform a credit review. A credit review is more than just a snapshot of your credit score. It offers a detailed look into your financial history. This can impact your ability to secure loans, get insurance, or even land your dream job.   

Whether you’re applying for a loan, renting an apartment, or simply keeping an eye on your financial progress, it is imperative to understand what a credit review entails. It can help you make informed decisions.  

In this guide, we break down what a credit review is, how it impacts your finances, and how you can use credit reviews to your advantage. 

What are Credit Reviews?

A credit review involves evaluating a person’s or a business’s credit profile. It is conducted periodically and essentially helps creditors, such as banks, credit bureaus, and financial institutions to evaluate the credit history and financial health of potential borrowers. 

Credit reviews are important when it comes to getting a loan approved and being able to assess the creditworthiness of the borrower. A credit review is a quick check of your financial history and habits to help lenders decide if you can repay a loan. It ensures responsible lending and helps you secure a loan that fits your credit profile.  

Types of Credit Reviews 

Credit reviews are of different types that happen at different times. The three main types of credit reviews include:    

During the Application Process: When you apply for any personal loan or credit card, lenders typically perform a hard inquiry to evaluate your credit history. Depending upon your credit history and credit score, they decide the loan amount and interest rate. This is the most common type of credit review.  

Periodic Review: Once the loan gets approved, some lenders may conduct regular credit reviews to check if you maintain good credit score and behaviour. If the lenders notice any issues in the middle of your loan term, they may work out new terms for the loan. 

Self-Review: You can review your credit history yourself. This is referred to as a “soft inquiry.” Checking your credit report helps you keep track of your financial behaviour. You can also detect any errors or frauds early on.

Purpose of a Credit Review  

The purpose of credit review is to evaluate the borrower’s credit history to understand how likely they can repay the loan. The lender gains a clearer view of the borrower’s credit habits and can identify if there are any potential red flags or negative information. 

To Determine Creditworthiness: Credit review is usually done by the lender to gauge the repayment capacity of the borrower. A credit review looks at your income, current debt, and financial stability. This helps lenders determine if you can afford to pay back a loan and if you’re likely to make timely payments. 

To Evaluate Credit History: Your credit history is an integral part of the credit review process. It reflects your part credit behaviour like how you manage different credits, whether you make timely payments, any instances of defaults and so on. This gives the lender valuable insights into your financial history, helping them decide the appropriate loan limit to offer. 

To Check for any Negative Information: Credit reviews help the creditor understand if there are any negative entries in the borrower’s credit history. This could include bankruptcy filings, late payments, settled accounts or any significant financial judgments. This information is crucial for the lender and too many such entries raise a concern. The borrower may face difficulty getting a loan or may get the loan at stricter terms 

Key Factors Considered During a Credit Review  

Key factors considered during a credit review include: 

1. Credit Score: A 3-digit number typically between 300 – 900, that represents your creditworthiness based on your credit history. 
2. Payment History: Your record of credit behaviour like making timely payments on loans, credit cards, and bills. 
3. Income: Your income, whether through salary, business, or other sources.  
4. Debt-to-Income Ratio: The portion of your income that goes towards paying the debt. 
5. Credit Utilization: The ratio of your current credit card balances to your credit limits. 
6. Current Debt: Your existing total outstanding loans and obligations you have. 
7. Credit Mix: The different types of credit you have taken, such as credit cards, mortgages, and loans.  
8. Length of Credit History: The total period for which you kept all your credit accounts and how you manage them. 
9. Recent Credit Inquiries: Any new entries for credit or loan applications, which can indicate financial stress or a need for more credit.  
10. Public Records: Records of any legal issues such as bankruptcies, foreclosure, debt settlements or tax liens.

Steps to Prepare for a Credit Review  

You can take these measures to ensure a good credit review and improve your chances of getting credit at favourable terms:  

1. Check Your Credit Report: Get your credit report from the credit bureaus (e.g Equifax, Experian, TransUnion) and review it yourself. Check for any errors, incorrect information, or inaccuracies.  
2. Know Your Credit Score: You may check your credit score via your bank, credit card issuer, or a trusted credit monitoring service. Understand what your score means (poor, fair, good, excellent) and ways to improve credit score.  
3. Dispute Errors: If there are any errors on your credit report, file a dispute with the credit bureau and get it resolved.  
4. Pay Down Debt: Clear your existing loans to lower your credit utilization ratio. Pay off high-interest debt first to save on interest payments. 
5. Avoid New Credit Applications: Before a credit review, avoid applying for new credit or loans. Each application results in a hard inquiry, which can lower your credit score. 
6. Pay Bills on Time: Make timely bill payments, including credit cards, loans, and utilities. Ensure they are paid on or before the due date. Set up auto payments to avoid defaulting on any payments. 
7. Address Negative Remarks: If asked about negative marks on your credit report, be ready to explain them. Provide valid reasons for issues like late payments, defaults, or bankruptcies if needed. Reach 
8. Arrange Financial Records: Gather important documents like tax returns, bank statements, and loan information. Ensure these documents are accurate and readily available if required. 
9. Resolve Negative Accounts: Contact the lender to settle the case either by making repayments or negotiating on terms. Request a letter of agreement from the lender to confirm the terms and avoid issues during the credit review. 
10. Practice Financial Discipline: Avoid maxing out credit cards or incurring unnecessary debts. Stick to a budget and show responsible financial behaviour. 

Follow these steps to present yourself as a reliable borrower, ensuring a positive impression during your credit review. 

9 Common Misconceptions About Credit Reviews

Here are 9 common misconceptions about credit reviews: 

1. My Credit Score Is the Only Factor 

Many think that only their credit score matters. But there are other important factors like payment history, credit utilization, and length of credit history. 

2. Credit Reviews Are Only for Loans 

People often think credit reviews only impact their loan applications. However, they impact insurance rates, rental applications, and job opportunities. 

3. A Hard Inquiry Will Always Lower My Score 

While hard inquiries can temporarily lower your score, they have a minimal impact in the long term, especially if you’re just looking for the best rates or terms. 

4. Checking My Own Credit Will Hurt My Score 

This is false. Checking your own credit is considered a soft inquiry and doesn’t affect your score.  

5. Closing Old Accounts Will Improve My Credit 

Closing old accounts can actually hurt your score as it reduces your credit history length.  

6. If My Credit Is Poor, There’s No Hope for Improvement 

While it may take time, poor credit can be built over time by good credit-building habits by paying off debt, avoiding late payments, and addressing errors on your credit report. 

7. Credit Reviews Only Look at Current Debt 

Credit reviews do consider your past credit behaviour, such as late payments, defaults, and bankruptcies. This can impact your credit score and future credit approvals. 

8. A Good Score Guarantees Approval 

While a good credit score increases your chances of approval, it’s not a guarantee. Lenders have certain eligibility criteria that must be fulfilled for the loan to be approved. For instance, some lenders require the borrower to have a minimum monthly salary 

9. Negative Marks Stay Forever

This is false. Negative marks, like late payments or bankruptcies, don’t stay on your report forever. Most negative marks fall off after 7–10 years, depending on the type. 

Understanding these misconceptions can help you better navigate the credit review process and manage your credit more effectively. 

How Credit Reviews Impact Your Financial Health 

1. Loan Approval: Credit reviews help decide if you can get loans or credit cards. A good credit score boosts your chances of approval.
2. Interest Rates: A higher credit score leads to lower interest rates, while a poor credit score can result in higher costs.   
3. Credit Limit: Lenders use credit information to decide your credit limits.
4. Financial Planning: Regular credit reviews give you a clear picture of your financial health, helping you understand areas of improvement, like reducing debt or paying on time.
5. Housing Prospects: Landlords often review credit to approve rental applications.  
6. Employment Prospects: For certain senior-level positions or industries that involve finances, employers may check your credit history to determine how efficiently you manage your finances.
7. Insurance Premiums: Having a good credit score can help you get insurance at a lower premium.

Conclusion  

A credit review is important to understand your financial health and how it affects your ability to get loans, insurance, and more. By knowing what factors are reviewed, you can take steps to improve your credit and make smarter financial choices. Regularly check your credit, fix any mistakes, and manage your debt to keep it in good shape. Stay informed and take small actions to build a stronger financial future.