By working in a credit department, decisions are made every day that impact the profitability of your business and could create a loss for your business. The basic function of the credit department is to maximize profits while mitigating risks. This is established through the company's credit policy. The policy can be administered in a variety of ways by establishing a credit limit, how many days they have to repay, and requiring a number of established credit trades before extending credit. What the policy is trying to quantify is human behavior. Will the entity follow the agreed upon terms of repayment? Is extending credit a science or an art?

Credit modeling looks at the science or statistical probability of behavior taking into consideration credit scores, available credit, number of trades, number of public records, and many more quantitative items. And then, through algorithms, a scoring model is developed to assign credit limits, terms or denial of credit. In essence this is trying to predict how the extension of credit will perform over time based on past performance as measured by statistical data. This is a very sound process as most banks and other lending institutions rely on this model. 

However, if the recent great recession has taught us anything, not all financial out comes are within our control as almost overnight over 8 million people lost their jobs. Not all events can be foreseen in statistical modeling. There are unforeseen events that happen in everyone's life that can impact their financial status. As you are deciding to approve or decline credit, it is your job to gather as much information from the borrower as you can to make that determination. Some of the data may be analytical and some may be anecdotal. I do not think credit can be based solely on past credit history. You have to get to know your customer by understanding their background, their industry, their level of business acumen, and the current business climate. With this information, along with an understanding of their credit history, there is a better holistic picture of what challenges are faced by extending credit.

I would say that establishing credit is an art. Experience is needed to analyze the future and the market place to weigh possible outcomes. The more information you have either statistically or from your customer can only help you make a better decision and benefit your business.