Credit Risk
What is credit risk?
An assessment of the likelihood that a borrower – whether a company or an individual might not be able to pay back the money loaned. It can also apply to the risk that a bond issuer won't pay up when they are supposed to.
Where have you heard about credit risk?
If you take out a loan your lender will look to see what kind of a credit risk you are. You may also see adverts from companies like Experian and Equifax suggesting you check your credit score, which is a measure of your credit risk.
What you need to know about credit risk...
Lenders make judgements about how likely borrowers will be able to afford repayments out of their future income because their potential income is unlikely to be guaranteed. When deciding whether or not to lend, they will weigh up things like: whether you have paid back other loans in the past, the terms of the loan and any security they will get against the loan.
The idea of credit risk doesn't just apply to individuals wanting to borrow money but companies and governments too. If you are buying a bond you are lending a company or government money. When you take the decision to buy and consider the price you are willing to pay for that bond you have to decide how likely it will be that you are paid the interest promised and/or that the value of the bond will be redeemed in full at the end of the term.