What is the main purpose of carrying out a test of credit approvals?

The primary purpose of carrying out a test of credit approvals is to assess the financial responsibility of potential customers. This evaluation helps businesses determine whether a customer is likely to meet their future credit obligations based on their credit history, income, debts, and overall financial behavior. By effectively assessing creditworthiness, companies can minimize the risk of defaults, reduce losses, and ensure that they are extending credit only to those customers who are financially capable of paying their obligations.

This practice is critical in various industries, particularly in finance and retail, where credit transactions are common. By understanding a customer's capacity to fulfill payments, businesses can set appropriate credit limits, tailor payment terms, and make informed decisions regarding sales and financing.