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What does It Mean to Have a High Credit Risk?

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  • Written By: Jim B.
  • Edited By: Melissa Wiley
  • Last Modified Date: 11 February 2020
  • Copyright Protected:
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    Conjecture Corporation
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Having a high credit risk means that an individual is considered a poor candidate for a loan based on past credit history. In other words, there is no assurance that the institution lending a person with bad credit will ever see repayment of its loan. Lenders use measurements like credit ratings, which are based on financial information and past borrowing history, to determine whether an individual is a high credit risk. A person can improve her credit standing by consistently paying back loans in a prompt manner.

Loans are used by people to help them with any manner of important purchases. People use loans to buy houses or cars, or they sign up credit cards, which are essentially loans from a credit company to the consumer, to make everyday purchases. Lenders require that the principal of the loan be repaid, along with regular interest payments, by the borrower. Any individual relatively prone to defaulting on a potential loan is considered by lenders to be a high credit risk.

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To determine whether a person is a high credit risk, institutions like banks, credit card companies, or other lenders can do an investigation of that person's past financial history, known as a credit check. The basic component of a credit check is the credit rating, which assigns a numerical value to the person's past success paying off loans. A low credit rating means that an individual may not have the capability to pay back a loan in the specified time.

There are significant consequences for any individual considered to be a high credit risk. For one, lenders may choose to refuse a risky borrower a loan, as these institutions can suffer severe financial damage from multiple defaults. If a lender does choose to offer a potentially risky borrower a loan, it usually comes with terms that are favorable to the lender. These terms may include a high interest rate on the loan, a short time allowed for repayment, or the requirement of some form of collateral from the borrower to secure the loan.

It is important to realize that a person considered a high credit risk may have ways of changing his standing in the eyes of lenders. The best way to do this is to begin paying off any outstanding loans in danger of being defaulted as quickly as possible. In addition, a person should take care to choose future loans that he can pay off in the manner required. By taking these steps, the person's credit rating will eventually improve, and more favorable loan opportunities should come his way.

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