Credit Score vs Credit Risk Assessment: What’s the Difference?

credit score check

Borrowing needs a lot of screening and eligibility processes to be fulfilled. It is not easy to simply get any fund requirement fulfilled without meeting the eligibility and going through the credit assessment. Financial institutions and loan providers are very particular when it comes to approval. Various elements and factors are taken into consideration. The main idea is to find the likelihood of the borrower’s ability to repay the amount with interest. No financial organization would like to entertain a loss. Therefore, they pay extra attention to the approval process. Credit scores and credit assessments often look very similar and that can confuse borrowers. It is important to understand the two aspects clearly so that the eligibility can be fulfilled. Every loan provider will determine credit score and credit assessment separately, as both terms stand for different things. Though the aspect is similar, the meaning, calculation and usage are different. Knowing the difference will help you maintain them the right way, so that it becomes easy for you to borrow without any hurdles.

Define a credit score

A credit score is a three-digit number that focuses on determining the creditworthiness of a borrower. It is important to find out the credit health and credit background of an individual. This three-digit score is offered after a complete representation of the credit report where every financial activity is recorded. Loan providers use this score to understand the discipline the borrowers follow while repaying the loan and the track record of customers before a huge amount of funds is risked. This score helps gain enough knowledge about the borrower. The financial condition and habits in the future help to determine the future chances of risk and smooth repayment. The loan providers are only interested in one thing, and that is the loan repayment. If you manage to maintain a good score, then you will get an easy loan approval along with good rates and charges.

Which factors affect or impact your credit score?

A credit score is impacted by several factors. There are a lot of factors that impact the score by a certain percentage. Once you know the factors and their affecting percentage, it becomes easy to find the right ways to improve your credit report and maintain it.

  • Credit history, which accounts for 30% of CIBIL score calculations. This will include all credit accounts, like credit cards, loans, and any form of credit taken by the individual.
  • Miscellaneous factors, like how many applications have been made in the past, account for the rest of the 20%. This will include the number of times you have applied for a loan. This is why you should not keep applying for multiple loans. This part affects your score heavily by 20%.
  • Credit Utilization, accounting for 25%. This part includes the utilized credit limit on loans and credit cards. If you use up or exhaust the entire credit limit, your credit score is affected.
  • Credit Duration, accounting for 25%. Credit age is a very important factor. The older the credit age of an account, the better it will be for the credit score. New credit accounts do not get counted and that is why you should not close old credit accounts even when you do not use them.

Define credit risk assessment

Credit risk assessment is a term that measures the amount of risk involved in offering a loan to a borrower after confirmation of his credit score and other eligibility. It measures the possibility of a loan provider not getting back the loan amount and the interest. The approval of a loan is decided in terms of how much risk is associated. Whereas in a credit score, the score talks about how well an individual has maintained his credit background. The credit risk assessment is made after considering all the factors. If there is a risk, what is the possibility and probability of the risk factor? This considers various factors and only then the probability of risk is determined. At the time of approval or denial, the decision is taken only after an assessment of the credit risk. When the loan providers find out that the credit risk assessment is very high, only then do you receive a rejection. When the risk is there but low, then loan providers can take a chance by approving it at a high rate of interest. Credit risk assessment helps in assessing and measuring the risk so that the loan provider takes the right decision. Here are some of the factors that help in deciding and impact the credit risk assessment.

  • Capacity to repay
  • Capital
  • Credit history
  • Credit score
  • Associated collateral or security
  • Loan conditions and terms

Finishing up

A credit score speaks about creditworthiness and how well an individual has maintained a credit background and journey. On the other hand, the credit risk assessment term means the possibility and probability of risk associated with an individual if they are offered a loan. Check the credit score so that you are aware of your credit report.

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