What is Impaired Credit?
Impaired credit is a term used in describing someone with defaults, that are detailed on their credit report. Firstly, this term is more severe than the term Adverse credit but similarly does not have any need to be met before this term can be applied. However, these two terms are similar in name but it is not quite the same thing, even though many of the principles apply to each.
If you have impaired credit or adverse credit, you may have a ‘life event’ like an illness, or a failed venture and are often seen as too high risk, even if you have overcome the event.
Understanding Impaired Credit
This is credit is mostly the result of financial stress. Which is brought about by a change in an individual or entity. In the case of an individual, impaired credit may be the end result of losing a job. Or illness, a steep decline in asset prices, a failure to pay their credit card bills on time, and a load of other reasons. When it comes to a corporate entity, creditworthiness may decline. If their financial position declines over time. Because of poor management, or a weak economy. In either case, impaired credit could be the result of internal forces, or self wounds. However, at other times, external factors are at play which may be out of control.
Understand that impaired credit, May require changes to operations to alleviate financial stress. Which leads to improvements in a balance sheet’s condition. Now, these changes include reducing expenses, selling assets, as well as using cash flow. In paying down debt to reduce it to a manageable level.
There are techniques in assessing an entity’s credit impairment, or credit analysis. Here are the four “Cs” of credit
This is the ability to service debt levels
It is posted collateral as a buffer against market value losses
Loose or tight covenants to indentures
This includes experience, values, and aggressiveness.
Typically, most banks will allow their clients to check their FICO credit scores. Also, the highest credit score possible is 850, even though an individual with a credit score between 670 and 739 is seen to have good credit.