What is credit risk?

[kred-it risk] n. The risk to a lender that a debtor will fail to repay a debt.

As is the case in any for-profit businesses, banks and other lenders strive to make money. They do this by providing loans to debtors in exchange for a repayment that exceeds the amount of the original loan.

Of course, in order to make money, lenders need debtors to repay their loans. This is why lenders will deny credit to consumers with a very high credit risk. There is too great a chance that they will not make money from the transaction.

In cases where there is only a moderate credit risk, however, lenders will still extend credit but they will charge a higher interest rate to offset their risk. From the lenders perspective, they are willing to extend credit to 10 people where there is a 1 in 10 chance one of the debtors will default on the loan if they know the additional interest paid by the other 9 debtors will make up for the loss.

Unfairly paying for
the credit risk of others?

This system works out well for lenders because they still profit, but if you are one of the 9 people who pay back your entire loan, you are basically paying for your loan plus one ninth of the outstanding debt from the debtor who did not. This is the penalty the 9 people in the example receive for being labeled as a high credit risk.

To make matters worse, many people are falsely classified as being a high credit risk because of inaccurate or misleading negative items in their credit reports. Lexington Law helps clients legally dispute these questionable negative items in an effort to show lenders a more accurate representation of your credit risk.

Last year, our clients saw
over 600,000** negative
items removed from their
combined credit reports.

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