Credit and Collection The goal of a credit scorecard is to

distinguish between customers who repay

their loans (“good” customers) and
Which of the following is NOT a class of customers who will not (“bad” customers). –
credit discussed? – Student Credit True

What type of credit is provided to farmers

and agricultural businesses? – Agricultural
Institutional or Formal Credit Sources
Credit
1. Banks
Which of the following is a non-institutional
2. Credit Unions
source of credit? – Peer to Peer Lending
3. Financial Institutions
Which of the following is NOT a component
Non-Institutional or Informal Credit Sources
of an investigation report? – Loan
Affordability 1. Trade Credit
2. Retail Credit
What ratio compares total debt to gross
3. Informal Sources
monthly income? – Debt to Income Ratio
4. Government Programs
Which credit scorecard type is used to 5. Microfinance Institutions
evaluate payment behavior after a loan is 6. Peer to Peer Lending
granted? – Behavioral Scorecard
Credit Instruments
A promissory note is a legal financial
1. Promissory Note
instrument stating a promise to pay a debt –
2. Treasury Bill
True
3. Bank Draft
Microfinance institutions primarily provide 4. Trade Bill
large loans to established corporations - 5. Cheque
False 6. Bond
7. Bill of Exchange
The 5C’s of credit include Character,
Capacity, Capital, Collateral and Condition – Chapter 3
False
Credit Agency – is a far profit company that
Employment stability is a financial factor in collects information about individuals and
creditworthiness – False businesses debts and assigns a numeral
value called a credit score that indicates the
The loan repayment equation helps borrower’s creditworthiness.
determine the monthly installment amount –
True Credit Report – is a credit history record
created by a credit bureau, providing
Social behavior is considered a non- lenders with information about borrowing
financial factor in assessing and repayment habits for loan applications
creditworthiness – True
Components of Credit Report
Credit report is comprehensive document
that evaluates the creditworthiness of a 1. Personal Information
credit applicant – False 2. Credit Accounts (Trade Lines)
3. Credit Inquiries
4. Public Records
 5. Collections Chapter 2
6. Credit Score
Investigation Report – a comprehensive
Credit Bureau – is an institution that document that evaluates the
collects, preserves, and investigates creditworthiness of a credit applicant.
personal credit data to assist lenders,
Components of an Investigation Report
creditors, and other financial organizations.
1. Applicant Information
5 Factors affecting Credit Score
2. Credit History
1. Payment History (35%) 3. Financial Analysis
2. Credit Utilization Ratio (30%) 4. Non-Financial Factors
3. Length of Credit History (15%) 5. Credit Score
4. New Credit (10%) 6. Credit Scorecard
5. Credit Mix (10%) 7. Credit Equation
8. Conclusion/Recommendations
Special Accessing Entities (SAEs) – are
accredited private corporations providing Financial Factors to Check on Credit
credit reports, ratings, and other value- Applicant
added services, including credit scoring,
Credit History
portfolio review, and analytical reports
derived from the CIC. Payment History – Lenders review the
applicant's past payment behavior on loans,
Credit Information Corporation (CIC) – is a
credit cards, and other credit obligations.
GOCC or Government owned and control
corporation, established in 2008 under CISA Length of Credit History – A longer credit
(Credit Information System Act) that history generally indicates more experience
manages the Philippines’ credit information managing credit, which can be viewed
system to help creditors assess borrower’s favorably by lenders.
creditworthiness.
Types of Credit Used – Lenders may
CIBI Information Inc. – is a credit bureau in consider the types of credit the applicant
the Philippines that provides credit reports, has used in the past.
background checks, and business
intelligence to help asses creditworthiness Income and Employment
and reduce lending risks. Income Stability – Lenders want to ensure
CRIF Philippines – was established in Italy the applicant has a stable and reliable
and is well known for its innovative data source of income to repay their debts.
solutions. It provides credit reporting, risk Income Level – The applicant's income level
management, and business intelligence is a key factor in determining their ability to
services in more than 50 countries. handle debt payments.
TransUnion Philippines – a credit bureau Debt-to-Income Ratio (DTI) – This ratio
approved by the Credit Information compares the applicant's total debt to their
Corporation, helps consumers and gross monthly income.
organizations make financial decisions by
providing data analytics, fraud prevention, Dept and Expenses
and credit risk solutions.
Outstanding debt – Lenders will review the
applicant's existing debt obligations,
including loans, credit card balances, and Education – the applicant’s educational
other debts. background, including the degrees earned
and institutions attended.
Debt Utilization Ratio – This ratio measures
the amount of credit the applicant is Family Situation – the applicant’s family
currently using compared to their total obligations, including dependents and
available credit. household responsibilities.
Living Expenses – Lenders may also Behavioral Indicators – non-verbal clues,
consider the applicant's living expenses to communication style, and overall demeanor
assess their ability to manage their finances during interactions with lenders.
and repay debt.
Character Traits – observations regarding
Assets and Collateral traits such as integrity, accountability, and
overall demeanor.
Assets – The applicant's assets, such as
savings accounts, investments, and real Credit Scorecard – a credit scorecard is a
estate, can provide additional security for lookup table that maps specific
the loan and demonstrate financial stability. characteristics of a borrower into points.
The total number of points becomes the
Collateral – For certain types of loans, such
credit score. Credit scorecards are a widely
as secured loans, the applicant may be
used type of credit scoring model. As such,
required to provide collateral, such as a car
the goal of a credit scorecard is to
or a house, which the lender can seize if the
distinguish between customers who repay
loan is not repaid.
their loans (“good” customers), and
Non-Financial Factors to Check on Credit customers who will not (“bad” customers).
Applicant
Components of Credit Scorecard
Employment Stability – refers to the length
1. Collect Data
of time an applicant has been employed at
2. Transfer Points
their current job and their overall job history.
3. Score Calculation
Residential Stability – the duration of time
Types of Credit Scorecard
an applicant has lived at their current
address and previous addresses. 1. Application Scorecards
2. Behavioral Scorecards
Social Behavior – involvement in community
3. Collection Scorecards
activities, volunteer work, and social groups.
Development and Validation
References – personal and professional
contacts who can vouch for the applicant’s 1. Data Collection
character and reliability. 2. Model Building
3. Validation
Reputation – the applicant’s standing within
their community or industry.
Legal History – any past or current legal
issues, including bankruptcies, lawsuits, or
criminal records.
Basic Credit Equation – used by the lenders can afford based on their income and
to determine the maximum loan amount a existing financial obligations.
borrower can afford based on their financial
Affordable Loan Payment =
situation.
(Gross Income x Max Debt to Income Ratio)
– Existing Debt Payments.

Chapter 1
Debt to Income Ratio – used by lenders to
Investment Credit – is a type of medium or a
assess a borrower’s ability to manage
long-term loan. It can be used to fund the
monthly debt payments relative to their
start-up of your business or for new
income. It helps determine whether an
investments to further grow your business
individual can afford new credit obligations.
or a tax incentive that encourage investment
by reducing tax burden.
Agricultural Credit – the financial services
provided to farmers and other agricultural
businesses to support their activities.
Loan to Value Ratio – often used ratio in Supervised Credit – a type of lending where
mortgage lending to determine the amount the lender provides not only the funds but
necessary to put in a down payment and also the guidance and technical assistance
whether a lender will extend credit to a to the borrowers to ensure the loan is used
effectively and efficiently.
Public Credit – refers to a government’s
ability to borrow money. Governments
issues bonds to raise funds. Investors buy
borrower. these bonds, lending money to the
Loan Repayment Equation – used to government.
determine the fixed monthly installment Institutional or Formal Credit Sources
(EMI) a borrower must pay to repay a loan
over a specific period. It accounts for the Banks: Traditional banks are prominent
loan principal, interest rate, and loan tenure. sources of credit, offering loans, credit
cards, and lines of credit to customers. They
operate under rigorous regulatory
frameworks and provide a wide range of
financial products to cater to diverse
requirements.
Credit Unions: Similar to banks, credit
unions are member-owned financial
Loan Affordability Equation – helps cooperatives that extend credit services,
borrowers and lenders determine the often at favorable terms, to their members.
maximum monthly loan payment a person They prioritize community well-being and
typically offer competitive interest rates.
Financial Institutions: This category Capacity – measures the borrower’s ability
includes various specialized financial to repay a loan by comparing income
entities such as savings and loan against recurring debts.
associations, which primarily focus on
Capital – the borrower’s financial strength
providing home loans, and investment
and available assets to support loan
banks that assist in capital raising through
repayment if needed.
credit instruments like bonds.
Collateral – assets the borrower pledges as
Non-Institutional or Informal Credit Sources
a security for the loan in case of default.
Peer-to-Peer (P2P) Lending: P2P
Condition – refer to the purpose of the credit
platforms connect borrowers directly with
that’s being requested.
individual lenders, facilitating loans without
intermediaries. Credit Instrument – a document evidencing
the evidence of a credit obligation which
Microfinance Institutions: These
defines the responsibility of the debtor
organizations target individuals with limited
towards his creditor to collect from the
access to traditional credit, providing small
debtor on the date assigned.
loans to promote entrepreneurship and
alleviate poverty. Promissory Note – a legal financial
instrument issued by one party, promising to
Trade Credit: Businesses extend credit to
pay the debt owed to another party.
one another as part of commercial
transactions. Bill of Exchange – an instrument writing and
containing an unconditional order signed by
Informal Sources: Family, friends, and
the maker, directing a certain person to pay
Informal moneylenders are sources of credit
a certain sum of money only to or the order
within personal networks. While accessible,
of a certain person or the bearer of the
these sources may lack formal agreements
instrument.
and transparency.
Treasury Bills – is a short term obligation
Retail Credit: Retailers offer credit to
backed by the U.S Department of the
consumers for purchases through store
Treasury with one-year maturity or less.
credit cards and installment plans,
encouraging sales and customer loyalty. Cheque – is the most common instrument of
credit and almost works like money. It is a
Government Programs: Governments may
written order on a printed form by a
provide subsidized credit through programs
depositor (drawer) to his bank to pay a sum
aimed at supporting specific sectors, such
of money to himself or to somebody else,
as agriculture or housing.
whose name is entered on it, or to the
Credit Risk – is the risk that a borrower bearer, i.e., the man who holds it (drawee).
many not repay the loan, causing the lender
Trade Bills – ordinarily bills are drawn and
to lose some or all of the money lent.
accepted for the purpose of receiving or
5C’s of Credit making payments of good sold or
purchased on credit, such bills, which are
Character – refers to credit history, which is
drawn for consideration, are known as
a borrower’s reputation or track record for
Trade Bills.
repaying debts.
Bank Draft – a negotiable instrument whose Users of Credit Ratings
payment is guaranteed by the issuing bank.
Intermediaries – banks, financial institutions,
Bond – an instrument of indebtness of the fund managers.
bond issuer to the holders. It is a debt
Debt issuers – governments, corporations,
security, under which the issuer owes the
municipalities
holders a debt and, depending on the terms
of the bond, is obliged to pay them interest Businesses and Corporation – companies
(the coupon) and /or to repay the principal
at a later date, termed the maturity date.
Factors that affect Credit Ratings

Chapter 4 Financial Performance – one of the main

elements that impact credit ratings, this
includes metrics like cash flow, profitability,
and sales growth.
Credit Rating – is an assessment of the
ability of a corporation or government to Debt to Equity Ratio – measures how much
repay the interest due to investors on a loan debt an entity has compared to equity.
or other debt instrument.
Market Conditions – credit ratings can be
High Credit Rating – refers to a credit score impacted by market factors like interest
that falls within the "excellent" range, rates, inflation, and economic growth.
typically considered to be 800 or higher,
indicating a very low credit risk and a strong Industry Trade – a decline in customer
history of responsible credit usage, allowing demand for the entity’s goods or services
for easier access to loans with favorable may negatively affect revenue growth and
terms from lenders. profitability, which may result in a
downgrade in the credit rating.
Low Credit Rating - refers to a poor credit
score, indicating a high risk of defaulting on Political and Regulatory Environment –
debt, which means a person or business is changes in governmental regulations, such
considered likely to not pay their bills on as tax or trade laws, can affect economic
time or has a history of excessive debt, development, which may further influence
making it difficult to access loans or credit tax receipts and debt levels.
cards at favorable terms; typically reflected
by a score below a certain threshold on a
credit scoring system, like under 580 on a Credit Monitoring – is the process of
scale of 300-850. tracking credit reports for changes and
alerts, helping detect fraud and monitor
Classification of Credit Ratings financial health.
Investment grade ratings – investments are How Credit Monitoring Works:
typically less competitively priced in
comparison to speculative grade 1. Monitoring Credit Reports
instruments. 2. Real time alerts
3. Score Tracking
Speculative grade ratings – investments are 4. Identity Protection
high risk and offer higher interest rates to
reflect the quality of the investments. Benefits of Credit Monitoring:
 1. Early detection of fraud 1. Annual Free Credit Reports
2. Improved Credit Management 2. Credit Card Services
3. Financial Planning 3. Free Credit Monitoring websites
4. Peace of Mind
Key Features of Credit Monitoring:
Moody’s – Moody’s Investor Service is a
1. Credit Report Tracking company that provides credit ratings,
2. Fraud Alerts research, and risk analysis for governments,
3. Identity Theft Protection corporations, and financial institutions. Their
4. Score Simulators main job is to evaluate how safe or risky an
5. Breach Notifications entity’s debt is. The ratings they provide
help investor decide where it’s safe to invest
Types of Credit Monitoring:
and which investments are risky.
1. Free Credit Monitoring - is a service
How Moody’s Ratings Affect the Financial
that helps individuals track changes
Market?
in their credit reports and detect
potential fraud or identity theft. It 1. Interest Rates
provides alerts when there are 2. Investors Decisions
significant updates to a person's 3. Buying and Selling Bonds (Liquidity)
credit profile.
2. Paid Credit Monitoring - services
Minimum Amount Due – is the lowest
provide enhanced protection against
amount that a borrower can pay each month
fraud, identity theft, and credit-
to keep their account current and avoid late
related risks. Unlike free credit
fees.
monitoring, these services offer
more comprehensive features, Grace Period – is the amount of time
including identity theft insurance, between the end of a billing cycle and when
dark web monitoring, and full credit your bill is due. During a grace period, you
report access. typically won’t be charged interest on your
3. Manual Credit Monitoring - is a self- balance.
managed approach to tracking your
credit by regularly checking your Starting Limit – the initial amount of credit
credit reports and financial activity you’re given when you apply for a credit
without relying on paid or automated card.
services. It requires effort but can be Credit Limit – the maximum amount of
a free and effective way to stay on money you can borrow on a credit card or
top of your credit health. line of credit.
Annual Percentage Rate – usually referred
Credit Monitoring – tracks changes and to as APR, the annual percentage rate is
alerts you but does not prevent actions. the interest rate you are charged if you don’t
pay off your credit card balance in full each
Credit Freeze – prevents new accounts billing cycle.
from being opened in your name but
requires unfreezing for credit applications. Credit Utilization – is how much of the limit
you have in use. As it goes up, available
How to Monitor your Credit for Free
credit goes down but the limit does not
change.