Credit Risk Analyst

Determines the risk profiles and creditworthiness of an individual or business by analyzing their financial data and deciding whether or not to extend them credit

A credit risk analyst, also known as a credit analyst, determines the risk profiles and creditworthiness of an individual or business by analyzing their financial data and deciding whether or not to extend their credit. 

Commercial banks and investment firms typically employ credit analysts. They assist in the ongoing management and modeling of a credit risk after that. 

This analyst is crucially essential, specifically for lenders, because they analyze how risky it is to provide a loan or any form of credit to an individual or business. 

Such an analyst examines an applicant's loan application for credit. After carefully scrutinizing the applicant's financial information and data, the analyst determines if the applicant possesses the necessary income to repay the loan and the capability to do so. 

The information is based on the applicant's financial records and credit history. Conventionally, most banks have relied on subjective judgment to assess the credit risk of a corporate borrower. 

Bankers used information on various borrower characteristics such as character, reputation, capital (leverage), capacity to pay, earnings volatility, conditions of the customer's business, the purpose of the loan, and collateral in deciding whether or not to extend a loan. 

These characteristics are conventionally referred to as the 5 Cs. Developing this type of advanced system is cumbersome and expensive. Incorporating specific qualitative data in a risk model is particularly demanding. 

However, successfully implementing such a risk model eliminates human errors and reduces the potential for misuse of critical data. Commercial institutes have tried to duplicate their decision-making process from time to time. 

Nonetheless, many banks continue to rely primarily on their traditional expert system for evaluating potential borrowers and granting credit to corporate customers.

What do they do?

These analysts reviews and evaluates the financial history of an individual or company to determine if they are a good candidate for a loan. In other words, credit analysts gauge and determine the risk of default to the bank or lender.

These analysts examine loan applicants' credit, highlight the red flags, and assess the probability that a debtor will default on the loan. 

Credit analysts usually do not make the final decision on the grant of loans. They advise the business owners as to their opinion and allow the owner to decide whether to grant the loan.

They usually do their work from their office premises. However, if a small business applies for a loan, credit risk analysts sometimes visit the place of business to see whether its operations make it creditworthy. 

Visiting business places in person allows credit analysts to understand the daily operations and better understand how likely the business will succeed and eventually pay back the loan.

Education and training for a credit risk analyst

The typical education credentials required to become a credit analyst are a business-related bachelor's degree in finance, business, statistics, economics, or accounting.

However, they don't need more than a high school certificate.

An MBA is not required either. Regardless, MBA is increasingly being held or pursued by credit analysts to become more competitive for career advancement opportunities. In addition, commercial bankers also undergo intense credit training imparted by their banks or third-party companies.

They need to exhibit excellent problem-solving and interpersonal skills as well. They work primarily with companies and lenders, helping them determine if they should offer credit and, if yes, how much credit. 

Credit analyst requirements sometimes include industry certification, such as the Credit Risk Certified (CRC) designation offered by the Risk Management Association (RMA). 

To qualify for this certification, a credit analyst must have at least five years of experience working in loan review. They must also engage in continuing education, pass an examination, and become an RMA member.

Along with study modules to qualify for Credit Risk Certification, the RMA also offers beneficial courses, both self-directed and instructor-led, on concepts such as Balance Sheet Analysis, Structuring Commercial Loans, Analyzing the Commercial Borrower, and Borrower Analysis.

Another major part of a credit analyst's education can be a Chartered Financial Analyst (CFA) designation. CFA certification is accomplished through the CFA Institute's Chartered Financial Analyst program. 

It includes training in professionalism, ethics, portfolio management, and investment-related topics. In some cases, a CFA designation can overpower an MBA. As a result, the program is highly appraised and sought after. Completing the CFA program takes three to four years to complete.

The analysts interact with companies looking for credit as well. They will request the relevant financial statements and records. Sometimes, they may also act as a mediator for credit disputes and their resolutions.

Job description and requirements

Credit analysis is a distinct and peculiar area revolving around a firm's financial risk analysis. The loan financier must perform due diligence on rating the borrower's creditworthiness.

At the heart of their job, credit analysts assess risk. They must possess strong mathematics, risk assessment, and communication skills. They must be skilled in customer service, writing, spreadsheet accounting, and database programs. 

Although one could get a job with an associate's degree and relevant work experience, the more progressive and advanced degree one holds, the more likely they are to obtain employment.

Credit analysts should have the ability to work both independently and as part of a team. They should also know the operating systems of financial institutions, policies and procedures, and credit systems.

In addition to these skills, they should also possess strong analytic, organizational, problem-solving, research, and decision-making skills. 

The analysis involves assessing the risks that the business will likely experience by initiating a background investigation on the customer. A credit analyst is responsible for several tasks, which include guiding credit risks related to lending programs involving vast amounts of money. 

For example, a bank will hire a credit analyst to help assess the different firms and individuals it can offer loans to and generate a return on its cash assets.

The job responsibilities of a credit analyst include the following:

  • Evaluating credit risk
  • Reviewing credit applications
  • Analyzing financial data, statements, and trends
  • Monitoring risk trends of management and sales workforce
  • Projecting sales
  • Resolving and settling credit issues
  • Recommending credit limits based on the company's credit policies
  • Performing credit rating reviews of existing customers
  • Maintaining customer files with crucial financial particulars and bank references
  • Setting credit limits for new customers

Salary

A credit analyst with less than 1-year experience at an entry-level can expect to earn an average total compensation of $50,012. With 1 to 4 years of experience, a credit analyst can expect an average pay of $58,183.

In the mid-career, a credit analyst with 5 to 9 years of experience may earn an average compensation of $60,594. An experienced credit analyst with 10 to 19 years of experience makes an average total compensation of $82,424.

The U.S. Bureau of Labor Statistics reports that professionals in this field earned an average salary of $73,650 in 2019. In addition, employment is anticipated to grow 5% from 2019-2029, slightly faster than average.

Roles and responsibilities

A credit analyst is responsible for assessing the application of the loan applicants using a range of criteria, including the purpose of the application, credit viability, customer payment history, and customer creditworthiness.

Credit analysts are important for a healthy economy. Without the guidance and recommendations of credit analysts, banks, insurers, and companies won't be able to extend any loan for businesses, homes, cars, and occasionally employees' payrolls.

Credit analysts play the role of major decision-makers in the company. They deal with credit, heavy computer programs, and databases to maintain customer credit history and keep all financial data up to date.

Analysts recommend a business credit after considering certain risk factors. These factors may be stock market fluctuations, economic changes, and legislative and regulatory requirements. 

If a client struggles to meet payroll, it could suggest a decline in revenue and potential bankruptcy, which may affect the bank's assets, ratings, and reputation.

Some of the significant roles that credit analysts are required to perform include:

1. Review credit limits of existing customers

The credit analyst will gather the relevant financial information from the client and write a report on whether the client's current financial condition allows them to meet their financial obligations. 

The company will refer to the credit analyst's report and decide whether to increase or decrease a customer's credit limit.

2. Assessing credit risk

A credit analyst reviews a client's loan application for credit, and careful dissection of the client's financial information and data determines if the client possesses both the income required to repay the loan and the inclination to do so.

The analysis involves assessing the risks that the business will likely experience by initiating a background investigation on the customer.

3. Loan Evaluation

They must cross-check and authenticate the applicant's employment status, income and remuneration, credit history, and other vital financial information to ascertain their creditworthiness and capability to repay a loan.

They ensure that applicants fill out all required loan documents, and they answer any questions applicants have about the loan process.

Credit Score

Credit risk analysts are weighed down with the responsibilities of evaluating the creditworthiness of businesses and individuals and determining the line of credit. 

credit score is a number that provides the creditworthiness of an individual or business based on the analysis of their credit report. For example, lenders use a credit score to evaluate the risk of lending money to customers.

Lenders use a credit scoring system, or a numerical system, to measure how likely a borrower will make the payments on their borrows. It is created by allocating scores to various characteristics and traits associated with the applicant's creditworthiness.

The two most widely used credit scoring systems in the United States are FICO and VantageScore. Yet FICO is the most used conventionally. 

Banks and other institutes use these credit scores to help estimate the risk of doing business with applicants when they apply for a new loan or credit card. 

However, a majority of the lenders use FICO scores for credit decisions. . Regardless of the brand, at its crux, a credit scoring model is an intricate and complicated software program. 

It assesses the credit report details and estimates the risk that you'll have to pay an account 90 days or more late in the next 24 months.

A FICO score ranges from 300 to 850. Let's look into the ranges and what the scores mean to credit analysts:

300–579 (Poor) – You will be considered high risk by lenders of defaulting on your loans. Lenders might not approve your loans or credit applications. It means the applicant has a substantial amount of outstanding debt.

580–669 (Fair) – Many lenders may not approve your loans; those who do will considerably have higher interest rates and down payments. Applicants in this bracket have a decent amount of debt but are working to repay it.

670–739 (Good) – You will be considered at a lower risk of defaulting applicants. In this group, applicants have been given lines of credit and have worked to repay them punctually.

740–799 (Very Good) – Applicants in this stratum will be deemed to be a low risk for lenders. They will likely be approved for credit and get good deals on loans. Applicants in this bracket get lines of credit and efficiently repay their debts.

800–850 (Excellent) – You will be regarded as a shallow risk for lenders. Banks and lending institutions will provide the best rates and favorable terms on loans and credit cards for applicants in this group. This stratum is excellent at borrowing money and repaying it quickly without accumulating excessive debt.

The higher the credit score, the more chances an applicant can expect to get in terms of a line of credit or loan and negotiate the terms and conditions in a better way. 

It includes the interest rate, amount, and frequency of installments that need to be made and the period available to make repayments.

In this way, credit risk analysts draw conclusions from the available data, qualitative and quantitative, regarding the creditworthiness of an individual or an entity and make suggestions concerning the perceived needs and potential risks.

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Researched and authored by Sumedha Vasadi | LinkedIn

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