What Is a Credit Analyst?

A credit analyst is a financial professional who assesses the creditworthiness of securities, individuals, or companies. Credit analysts determine the likelihood that a borrower can repay their financial obligations by reviewing the borrower's financial and credit history and determining whether the state of the subject's financial health and the economic conditions are favorable to repayment.

Credit analysts are typically employed by commercial and investment banks, credit card issuing institutions, credit rating agencies, and investment companies.

Credit analysts interpret financial statements and use ratios when analyzing the fiduciary behavior and history of a potential borrower. They decide whether the borrower has adequate cash flows by comparing ratios with industry data benchmarks. For example, a credit analyst working at a bank may examine an agricultural company's financial statements before approving a loan for new farm equipment.

The minimal educational requirement for a credit analyst is an undergraduate degree in commerce, finance, or a related field.

Understanding the Credit Analyst's Role and Responsibilities

Credit analysis is a specialized area of financial risk analysis; therefore, credit analysts are called credit risk analysts. After evaluating the level of risk of an investment, the analyst will determine the interest rate and credit limit or loan terms for a borrower. Analysts use the results from their research to ensure that the borrower receives an affordable loan and the lender is protected if the borrower defaults.

Credit analysts work at banks, investment companies, credit unions, credit rating agencies, insurance companies, and asset management companies. A credit analyst gathers and analyzes financial data including the payment history of the potential borrower, any liabilities, earnings, and assets. The analyst looks for indicators that the borrower might present a level of risk. The data are used to recommend approval or denial of a loan or credit and to determine whether to increase or reduce credit limits or charge additional fees.

A credit analyst also contributes to the overall well-being of the economy because credit stimulates financial activity. Additionally, individuals and companies receive additional spending power from loans, lines of credit, and student loans, which can improve their lives and allow businesses to overcome temporary illiquidity.

Analysts who work in securities, commodity contracts, and other areas of financial investments earn the highest salaries among credit analysts, according to the U.S. Bureau of Labor Statistics.

Types of Credit Analyst Ratings

Credit analysts may also issue credit scores. For individuals, credit score generation is typically automated through algorithmic processes based on a person's credit payment history, spending, and past bankruptcies. A credit score is a three-digit number ranging from around 200 to 800. The most common type of individual credit score is the Fair Isaac or FICO score.

For debt issuers and their instruments (such as bonds), credit analysts assign scores based on letter grades such as AAA, AA+ or BBB. Below a certain rating, a company's debt is considered "junk," or below investment grade. These junk bonds typically carry higher yields to accommodate for the additional credit risk. Sovereign governments can also have credit scores on their bonds. Credit analysts who assess bonds often work at credit rating agencies such as Moody's or Standard & Poor's (S&P). Insurance companies are also rated on their credit risk and financial stability by ratings agencies such as A.M. Best.

According to the most recent statistics from the BLS, the mean annual salary for a credit analyst was $82,900. The highest in the U.S. was $121,480 in New York State.

Special Considerations: Reducing Risk

A credit analyst may recommend a business loan or business credit after considering risk factors. The risk factors may be environment-oriented such as economic changes, stock market fluctuations, legislative changes, and regulatory requirements.

For example, if a business client is struggling to meet payroll, this could be an indicator of a decline in revenue and potential bankruptcy, which may affect the bank’s assets, ratings, and reputation.

Financial data determine the level of risk involved in extending credit so that a bank can decide if it wants to proceed with loan approval. If the bank issues funding, the credit analyst will monitor the borrower's performance and may issue recommendations to terminate the loan agreement if it becomes risky. Determining the level of risk in a loan or investment helps banks manage risks and generate revenue.

For example, a credit analyst could recommend a solution for an individual who has defaulted on their credit card payments. The analyst may recommend reducing the individual's credit limit, closing their account, or switching to a new credit card with a lower interest rate.

Key Takeaways

  • A credit analyst analyzes investments to determine their potential risk for the investor.
  • Credit analysts are typically employed by commercial and investment banks, credit card issuing institutions, credit rating agencies, and investment companies.
  • Credit analysts examine financial statements and use ratios when analyzing the financial history of a potential borrower.
  • For debt issuers and their instruments such as bonds, credit analysts assign scores based on letter grades such as AAA, AA+, BBB, or junk, which is below investment grade.