What is Credit Risk Management?

Credit risk refers to the risk that a borrower will default on any type of debt by failing to make required payments. The risk is primarily that of the lender and includes, but isn’t limited to, the loss of the loan / credit provided plus any interest that could have been earned, disruption to cash flows, increased collection costs. The loss may be complete or partial and can arise in a number of circumstances. For example:

  • A consumer may fail to make a payment due on a mortgage loan, credit card, line of credit, or other loan
  • A company or an individual is unable to repay a debt to a supplier for goods & services already used
  • A business does not pay an employee’s earned wages when due
    Part of the management process to reduce the lender’s credit risk, can be for the lender to perform a credit check on the prospective borrower. In general, the higher the risk, the higher the interest rate will be that the debtor will be asked to pay on the debt.

By using sophisticated programs (such as those designed and developed by Creditinfo CEE) to analyse and manage risk. Companies can make better informed decisions whether to provide credit terms to their customer. They may also use in house programs to help them determine who they should lend to and how much and for how longer and on what terms.
A combination of using their own models and a system provided by an organisation such as Creditinfo (i.e. credit scorecards) to rank potential and existing customers according to risk, and then apply appropriate strategies is obviously more effective.

Think of it this way – would you lend €100 to a stranger?

Without knowing who they are, where they live, if they can afford to pay you back – you’re taking a gamble as to whether you will get the money back if you don’t know them.
Also, is it fair that a good borrower, that has always paid her mortgage, credit card bills, car loan, etc. on time, should have to pay the same interest rate as someone who has continuously defaulted on his repayments

Creditinfo Group - Höfðabakki 9, 110 Reykjavík, Iceland
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