Impaired Credit

What is Impaired Credit?

Impaired credit occurs when there is a deterioration in the creditworthiness of a company or an individual. In case of an individual, this is generally reflected via a low Credit Score. Or, if it’s a company, it results through the crease in credit rating that has been assigned to the company or the debt issued by the lender.

It results in the borrower with an impaired credit to have less accessibility to credit institutes. Not just that, but they also have to pay high-interest rates on the loans. A situation of impaired credit can either be temporary or a signal that the borrower may experience some substantial financial issues in the upcoming months or years. In either of the cases, impaired credit is definitely not good for the reputation.

How Does it Work?

Usually, impaired credit is the result of Financial Distress occurred by an alteration in the circumstances of a company or an individual. In terms of an individual, the impaired credit could be the result of failure to pay credit card bills, a decrease in asset prices, long-term illness, or a job loss.

For an organization, there could be a decline in the creditworthiness if the financial condition of the company deteriorates over a period of time because of a weak Economy, more competition, and poor management.

In either of these cases, impaired credit could come up because of self-inflicted problems or internal forces. In other scenarios, external factors may also play a huge role. Whether at the corporate level or personal, impaired credit might need drastic changes to the procedures or operations to enhance the situation that would eventually lead to better conditions in the Balance Sheet.

Generally, these changes include decreasing expenses, using cash flow to pay outstanding debt, selling assets, etc.

How is Creditworthiness Assessed?

There are several techniques that can help assess the credit Impairment. The most common method is to evaluate the four Cs of the credit Industry, which are:

• Capacity: This is the ability to pay back the debt
• Collateral: If the person or the entity has any Collateral
• Covenants: Tight or loose covenants to Bonds and indentures
• Character: The values, aggressiveness and experience of the company

Several banks automatically enable clients to check their credit scores. While 850 is regarded as the best score, anything between 670 and 739 is considered good. A score below 670 is a bad one.