Credit Risk- Determining Whether it's Worth the Investment

Credit risk is always a big issue in the investment world. Whether you are trying to determine how much of a credit risk you are or how much of a risk someone or something else is, you have to know what to look for. Credit is used to help lenders determine whether someone is worth a risk when it comes to borrowing money, and in the investing world it plays a big role in what you do or don’t have access to. Trying to figure out whether something or someone has a reasonable credit risk takes time and a lot of factors, but it can be done.

Things that affect the credit risk of any person or company include factors like:

-Credit history. If the person or company in question has a stable credit history, they are going to be a better credit risk. Those who have a poor history are less likely to get approved for the funding that they need simply because they don’t prove that they are worth it.

-Credit rating. Your current credit rating directly impacts the level of risk that you present. In the consumer world, a credit score of 720 or higher makes you an excellent risk, while a score below 599 makes you a very bad credit risk. Companies have a similar rating scale that helps determine how worthy of a risk they will be.

-Debt to income ratio. If you have more going out than you have coming in, as a consumer or a business, you have to make sure that you have a low debt to income ratio to be a better credit risk. That means to keep your debts low as much as you can, and pay things down whenever you get them up too high.

-Security or collateral. In some cases, you may want or need to provide some type of asset to prove that you are a valuable credit risk. That way, even if your information doesn’t prove you to be a good candidate, the creditor or investor will know that they aren’t losing anything by investing in you.

When you’re trying to determine credit risk, these are factors to consider. The world of credit risk is similar among businesses and consumers alike, even though the specific rules are different from one area to the next. Ultimately, as long as you understand the basics, you’ll be able to easily determine whether you, or anyone or anything else, are worth the investment in the end.

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