when lenders offer mortgages credit cards or other types of loans there is a risk that the borrower may not repay the loan similarly if a company offers credit to a customer there is a risk that the customer may not pay their invoices 3
credit risk can describe the chance that a bond issuer may fail to make payment when requested or that an insurance company will be unable to pay a claim 4credit risks are calculated based on the borrower s overall ability to repay a loan according to its original terms to assess credit risk on a consumer loan lenders often look at the five cs of credit credit history capacity to repay capital the loan s conditions and associated collateral 2some companies have established departments responsible for assessing the credit risks of their current and potential customers technology has allowed businesses to quickly analyze data used to determine a customer s risk profile bond credit rating agencies such as moody s investors services and fitch ratings evaluate the credit risks of corporate bond issuers and municipalities and then rate them if an investor considers buying a bond they will often review the credit rating of the bond if a bond has a low rating bbb the issuer has a relatively high risk of default conversely if it has a stronger rating bbb a aa or aaa the risk of default is lower 56credit risk vs interest ratesif there is a higher level of perceived credit risk investors and lenders usually charge a higher interest rate 3creditors may decline a loan to a borrower they perceive as too risky for example a mortgage applicant with a superior credit rating and steady income is likely to be perceived as a low credit risk so they will likely receive a low interest rate on their mortgage in contrast an applicant with a poor credit history may have to work with a subprime lender to get financing 3the best way for a high risk borrower to get lower interest rates is to improve their credit score if you have poor credit consider working with a credit repair company 7similarly bond issuers with less than perfect ratings offer higher interest rates than those with perfect credit ratings the issuers with lower credit ratings use high returns to entice investors to assume the risk associated with their offerings 8