In this week's column I
would like to address some of the questions that you have sent to me over the last two
Q. What are your thoughts on using the term credit guideline versus credit
line or credit limit. I believe credit guideline allows for flexability, guidelines being
subject to change as business conditions warrant. I was informed many years ago that using
the term credit line or credit limit was an implication that there was an obligation on
the creditor's part to extend credit of a nominal amount.
A. Credit guideline and credit line are actually the same. They allow for
flexability whereas a credit limit is rigid. One of our functions is to educate the
customer. The reason they may feel an obligation on our part to extend credit under a
credit line or credit limit is because they do not understand the meaning of the term(s)
and we have failed to explain it to them. The more we educate the customer about the
terminology we use the less confusion on their part and the easier it is to deal with
them. Their is an old saying about an educated consumer being a loyal customer. If you
choose to use the term guideline and it works for you then I certainly have no opposition
to it. But, regardless of the term used it is important that the customer understand that
credit is a priviledge and not a right. What is provided today may not be available
Q. Is the fact that a customer has always paid on time in the past sufficient
information to assume that they will continue to be creditworthy?
A. Change is a constant and although it would be comfortable to assume that
prior payment performance would be an indicator of the future, all too often that is not
the case. There are several factors that influence a customer's ability to perform. Among
those are: products and services; competition; customer acceptance; management and the
ability to raise debt. If any of these factors is insufficient then the customer may not
be able to continue to maintain their satisfactory performance towards its debt. Some past
examples: W.T. Grant, Eastern Airlines, Oklahoma Tire and Supply Company (OTASCO), etc..
These firms all were considered at one time to have excellent payment records but due to
changes in the above referenced factors they were unable to maintain their previous
performance and ultimately disappeared.
Previous payment performance along with current financial statements and
analysis of the factors mentioned above will determine the customers ability to continue
to be creditworthy.
Q. Credit scoring is used quite often in consumer finance, do you believe
this to be of any value in the commercial area?
Q. Do you have information on credit scoring and also the topic credit line
vs credit limit as this is of interest to us?
A. Credit scoring is an excellent method for qualifying a customer for credit
and many commercial credit grantors use credit scoring systems. There are many models
available which can be found in various publications. NACM's monthly magazine Business
Credit often features articles on credit scoring methods. They also discuss the question
of setting credit lines vs credit limits.
Practitioners Publishing Company of Fort Worth Texas has a new credit and
collections manual coming out which contains among other topics, information on credit
scoring along with an example of a credit scoring method. It also contains information on
credit lines vs credit limits. (I'm particular to this reference as I assited in its
development, you may e-mail me for information on how to obtain it as we are developing a
special price for credit club members).
Consumer & Business Credit Management by Robert Cole has a section on
credit scoring and credit lines/limits. Credit and Collections by Beckman & Foster and
Credit Executives Handbook by Christie & Bracuti both discuss credit lines/limits.
These are three excellent books on credit methods.
Keep in mind, however, that failure to meet the requirements of a firm's
credit scoring formula is not sufficient reason for denial of credit under Regulation B.
You must be more specific in your reason for refusing to grant credit.
That is all the space we have for this week. Please continue to write and as
I wish you well.