Assessing Credit Risk
There are several factors that go into assessing risk but the most important is your payment history. If you’ve paid all your accounts on time and as agreed, you will probably be considered a low risk. On the other hand, if you’ve had numerous late payments or even collection accounts, your risk factor goes up.
Another thing that creditors consider when assessing risk is the amount of outstanding debt you have — too much and you appear to be overextended which makes you a higher risk.
Other indicators of risk include:
- Length of credit history
If your credit history is too short, there is not much of a picture for potential creditors to look at. In other words, you have not yet proven yourself. Because of this, you may be considered a higher risk.
- Pursuit of new credit
Too many inquiries and it looks like you’re racking up too much credit. Potential creditors see this as a negative because you may be creating a situation where you are overextended and that may affect your ability to repay them.