What is Credit Risk and how to get rid of the term?

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Whenever you apply for a new loan, the first thing that the lenders check is your credit report to determine the degree of credit risk involved. However, not many are aware of the term and hardly know about how it impacts the chances of loan approval.

Basically, credit risk is the possibility of loss either due to default payments or contractual obligations. The risk is determined using the credit scores to access how responsible the applicant has been with their credit accounts and how timely has made the repayments. Degree of risk is always associated with the cost of borrowing as applications with higher risk are often granted loans or credits on higher interest rates and vice versa.

How credit risk occurs?
Just like scores, credit risk doesn’t develop over night. Instead, it is a result of constant failure to manage the finances well. Risk on a debt arises when a borrower fails to make the scheduled repayments for subsequent months. These default payments are then reported into the credit report, which reflects the degree of risk that a borrower carries. This remains on the report for up to 7 years, which then impacts the future chances of loan approvals. Therefore, it is significant to keep hands on some smart tips to avoid falling into the credit risk range.

Types of risks:
Before moving ahead, it is important to gain better insights about types of credit risks.
Credit default risk – This occurs when an individual borrower fails to make the repayments in full or have been carrying the outstanding dues for more than 90 days. This makes a major hit on the credit scores dragging the points down by around 40 to 80 points or even more. Credit default risk then impacts all the future dealings based on credit score such as loan, derivatives, or securities.

Concentration risk – This is basically linked to exposure of potential loss caused by any individual or group in order to threaten the core operations of a bank. The impact is so huge that recovery is doubtful.

Country risk – Country risk is determined with the degree of uncertainty associated with a particular nation or state. High degree of risk could result in significant losses to the investors as it signifies that a foreign government could default on its financial commitments. Country risk can be a result of number of factors such as political, exchange rate, currency rate, national economy, and technological influences. 

How to lower your credit risk?
Hence, if you have been looking for ways to lower credit risk, so to have hands on better financial dealings in future, here’s what tips you need to keep in mind.

Ask for salary slips – If you’re planning to get a loan anytime soon, make sure to ask your employer for a salary slip. The document should have company’s seal and director’s sign. This will give a fair idea to the lender about your income status and would ultimately help you get better loan rates.

Get the investment plan – If you have any plans to invest in a certain project or company, make sure to get the thorough details first to understand its objective and exposure to have good returns. Assess the credit risk of an investment plan and go ahead only if everything seems fine.

Provide collateral security – Just in case your credit scores are low and lenders have marked your application as on credit risk, make sure to submit collateral security to boost your creditworthiness. This will give lenders a relief that even if you default payments, they can cover the losses by possessing the collateral.