Consumer Credit Risk

Consumer credit is any borrowing used to finance non-capital purchases. A good way to consider consumer credit is borrowing for anything except a house or real property. Consumer credit can be the easiest credit to receive but also the easiest to ruin. Managing credit and maintaining credit is a vital part of working and living in a modern economy. Although there are some people able to have a quality lifestyle with no credit or borrowing, they are very few. Most everyone at some point will have to consider what sort of consumer credit risk they may be.

History

A consumer's credit history is very important to someone considering offering a credit card or personal loan. How people have handled their credit in the past is a very good indication of what they will do in the future. Assessing credit history is dictated by the federal Fair Credit Reporting Act (FCRA) and limits just how far a creditor can look into a borrower's past. Action, however, at intervals of the past one, three or seven years can weigh heavily in determining how much a risk a borrower will be.

Income

Of course, income also affects a person's credit risk. All debt must be paid with present and future income. If the income is too low to service the debt, then the risk is too great. Some borrowers will attempt to earn extra money with additional work, but creditors weight how long and how much the borrower can sustain such a work schedule.

Existing Debt

No matter the income of the borrower, if there is already debt drawing off some of the money, then how much will there be for new debt? Also, existing debt can indicate how "borrow happy" someone is. The credit history and the existing debt may show a borrower has just borrowed money from several sources and is now wanting more. This can indicate a deepening financial situation that the available income cannot overcome.

Stability

The borrower's work and lifestyle history can also affect the credit risk. If the borrower has been on the job for several years, it indicates steady income. If the borrower has had several jobs in just a few years it could indicate another job change is imminent. Such instability can affect the ability to pay the debt. Also, a borrower's home and address stability can affect credit. Moving around from place to place for reasons not related to job requirements (a military man or management professional may have to move regularly for work) can mean the borrower may be hard to find in a short while. This makes lending money more risky.

Trustworthiness

Consumer credit is usually unsecured. This means the only guarantee the lender has for getting payment on the debt is the borrower's trustworthiness to make the regular payments. All the factors considered when determining credit risk will be used to assess the borrower's sincere desire and ability to pay back the debt.