Credit policy

A credit policy is a set of guidelines and rules that governs how a company extends credit to customers. It defines the standards for approval, risk management, and responsible lending. A clear credit policy helps financial institutions control risk, protect financial health, and align lending practices with regulatory requirements.

Example

A bank's credit policy may define the criteria for evaluating loan applications, such as credit score requirements, income thresholds, and debt-to-income ratios. It may also set the loan terms and conditions, including interest rates, repayment schedules, and collateral requirements. With a defined credit policy, the bank can make consistent lending decisions, reduce the risk of non-performing loans, and maintain a healthy loan portfolio. It also helps protect both the lender and the borrower by ensuring loans go to customers with the ability to repay, which lowers the risk of default and financial hardship.