About Credit Risk – Types of Credit Risk

About Credit Risk – Types of Credit Risk

Credit risk is evaluated when a borrower is unable to pay payment for borrowed amount. Also credit risk is evaluated by credit reporting agencies when awarding credit score to individual consumers based upon their past consumer history.

Each lender will use their own credit model to evaluate credit risk for borrowers, however in America most of the business use credit reporting agencies for up to date credit history. It also makes sense business to depend upon credit reporting bureaus as they get consumer information from various sources.

Lenders employ various formulas to evaluate cost benefit analysis and factor in different interest rates to cover money loaned to borrower. They also add different clauses in contract to ensure tht they remain in control of loan agreement.

To be on top of loan management lenders apply different restriction on loan agreement. They can reduce the loan limit or credit limit to card issuers. They can increase interest rate if card issuers or borrower misses payment or is not able to pay minimum due payment. They can also claim your possessions if you are braking out of contract without paying the loan amount. All these option lenders use to minimize their credit risk.

Getting hold on your credit is in your hand. Financial responsibility of managing your credit lies on individual consumer. There are tools by which you can see your earnings, liabilities and ratio of available credit against used credit. Consumers should avail facilities of credit bureaus in getting free copy of credit report and understand the factors which lower or higher credit risk.

Other type of risk known in business are Market risk, Interest rate risk, Legal risk, Liquidity risk, Operational risk, Optimism bias, Volatility risk, Settlement risk,Concentration risk etc.