Credit Score
A credit score provides a quick overview of a company’s financial risk. The score helps you assess how prudent it is to do business on credit and supports decisions regarding, for example, payment terms and credit limits.
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What is a credit score?
A credit score is a standardized assessment of a company's credit risk. Various company data points are combined into a score or risk category, making it easier for you to evaluate and compare companies.
For example, a credit score can help in deciding whether to allow a new customer to pay on credit. For existing customers as well, a score may prompt a review of credit terms.
The score thus quickly guides you toward a credit decision, without requiring you to analyze all available company information yourself each time.
What does a credit score tell you about a company?
A credit score provides an indication of the risk you face when extending credit to a company. It is important to know what risk the score measures.
For example, one score might indicate the likelihood of financial problems or bankruptcy, while another indicator shows how a company actually pays its invoices.
A credit score is therefore no guarantee that a company will or will not pay. View the score primarily as an objective risk indicator that helps determine whether additional assessment or measures are necessary.
How is a credit score determined?
Various types of business information can be used to determine a credit score. These include financial data, company characteristics, developments within the company, and information about payment history.
Which data points are included and how much weight they carry depends on the scoring model used. The purpose of the score also plays a role in this.
Furthermore, new information can lead to a change in the score. A credit score is therefore a snapshot of the risk profile based on the information available at that moment.
What is a good credit score?
There is no universal threshold for a good credit score. The significance of a score depends on the scale used and the underlying model.
For some models, a higher score indicates a lower risk, but this principle does not automatically apply to every rating or risk indicator. Therefore, always consider the meaning and scale of the specific score.
Altares Dun & Bradstreet uses various scores and ratings to provide insight into specific aspects of business risk. For example, the Failure Score an indication of the risk of bankruptcy or business closure, while PAYDEX® provides insight into actual payment behavior.
Would you like to know how these different scores are calculated and interpreted? Then check out the Ratings and scores from Dun & Bradstreet.
How do you use a credit score when making a credit decision?
A credit score is particularly valuable when you link it to clear rules within your credit policy.
For example, a company with a favorable risk profile may be eligible for standard payment terms and an appropriate credit limit. In the case of increased risk, you can opt for a lower credit limit, a shorter payment term, prepayment, or additional due diligence.
For example, a credit score helps assess comparable customers based on the same criteria. This makes credit decisions more consistent and less dependent on individual judgments.
The score does not necessarily have to be the final factor in the assessment. Especially when dealing with larger loan amounts or increased risk, it is wise to also examine the underlying business information.
Credit Score and Creditworthiness: What's the Difference?
Credit score and creditworthiness are closely related, but they do not mean the same thing.
Creditworthiness describes, in a broader sense, the extent to which a company is expected to be able to meet its financial obligations. A credit score expresses a specific component of that risk as a standardized score or risk class.
A credit score is therefore a tool for assessing creditworthiness, but it is not the sole basis for judgment.
Read more about corporate creditworthiness and what factors play a role in this.
How can you check a company's credit score?
Would you like to know what risks you face before accepting a new customer or allowing them to pay on credit? If so, you can run a credit check.
In doing so, you look not only at a credit score, but also at other relevant business information. This gives you a more complete picture of the financial reliability of a potential or existing customer.
Would you like to rate a business right away? Perform a credit check featuring up-to-date business information from Altares Dun & Bradstreet.
Why does a credit score change?
A company's financial position and risk profile can change over time. New financial data, changes in payment behavior, or other business developments can therefore affect a credit score.
A favorable assessment at the start of a customer relationship does not, therefore, automatically mean that the risk will remain the same later on.
For organizations with many customers, it is possible to perform credit monitoring and help you identify relevant changes in a timely manner. This allows you to reassess whether the credit limit, payment terms, or other measures still align with the current risk.
Summary
A credit score provides a standardized indication of a company’s credit risk. The significance of the score depends on the model used and the risk being measured. Therefore, use a credit score as a tool to aid in credit decisions and, where necessary, combine it with other business information and your own credit policy.
Credit score is part of credit risk management. Read more about it here on our Credit Risk Management page.
Direct contact with a Credit Risk specialist.
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