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 tomorrow.

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 always

I wish you well.