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Credit analysis is crucial as it helps lenders assess the creditworthiness of borrowers, enabling informed lending decisions. By evaluating financial history, repayment capacity, and risk factors, credit analysis minimizes the likelihood of defaults and financial losses. It also aids investors in understanding the credit risks associated with various securities, ensuring better investment choices. Overall, effective credit analysis fosters a healthier financial environment by promoting responsible lending and borrowing practices.

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What is credit analysis?

Credit analysis is a study by a credit analyst where -- based on the loan application and the available info from 1, 2, or 3 credit bureaus -- she analyzes and attempts to predict how responsible the prospective borrower is in the use of credit. In other words, whenever a prospective borrower applies for a loan, a credit analysis is done, in order to discover A) What the prospective borrower's payment history is, B) How much credit has been already extended to him, and C) If he has the capacity to repay the proposed loan under the terms of the most likely loan agreement.