Dynamic Credit Score

Financial professionals often rely on credit score modeling to determine how much credit to extend. Some companies use static credit scores, while other companies use dynamic scores. A dynamic credit score changes as parameters or data changes. Companies can then adjust credit extensions accordingly. Credit card companies use a similar model, such as when they increase your credit limit based on payment history and other factors.

What Are the Benefits of Dynamic Finance?

A company can make better lending decisions when it uses a dynamic credit score. It can take current trends and conditions into account before extending credit. Doing this helps to minimize risks and losses for the company. It also helps to keep customers happy by not advancing too much credit and then having to increase interest rates or decrease credit limits later on.

What Are the Drawbacks of Dynamic Finance?

The main drawback of the dynamic model is that it can be challenging to track. Companies need systems to monitor data and changes to ensure they use the most accurate information possible. This can require additional staff or resources. To add to this, dynamic credit scores can change rapidly, making it difficult for companies to keep up with the changes.

What Is the Correlation Between Collections and Credit Score?

When debts go into collections, they might show as delinquencies on an entity’s credit history. Companies have different parameters regarding when they report debts as past due to the organizations that track this information. Once reported, this can leave a stain on the credit history that could take years to remove.

Some collections departments or agencies might also show more leniency to debtors with high credit scores. For example, Company X owes $50,000 and is now 60 days past due. However, it has maintained a high score rating with the creditor because of a long relationship with a previously good payment history. Consequently, the company’s A/R department takes a more lenient approach to secure payment.

When companies sell debts to collection agencies, they might set rules on how to pursue payment based on credit scores. For example, it might feel willing to work out payment plans with companies that have high credit scores. But, it might pursue litigation with companies that have a low score.

What Is a Dynamic Collection Agency?

A dynamic collection agency changes its methods or tactics based on the debtor’s situation. This type of agency may be more likely to work with a debtor in a difficult financial situation and may be more willing to negotiate a payment plan or settlement. A dynamic solutions debt collector likely relies on a complex web of factors when determining how to secure payments.

How Does A/R Automation Simplify Use of the Dynamic Credit Model?

Accounts receivable automation can simplify the process of tracking data and changes for dynamic credit scores. Software can track customer payment history and other data points. The A/R team then uses this data to generate dynamic credit scores. Companies can also use internal data points, such as debt collection performance, to determine when to ramp up efforts vs. when to extend some leniency. Book your free Gaviti demo to see what A/R automation can do for your business.