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What is Credit Risk?

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Credit risk is a potential that an organization, business or person is unable or unwilling to pay a debt. Typically, investments with a higher credit risk pay a higher rate of interest. Credit risk fluctuates with time as the financial condition of a debtor changes. Credit risk can result in a delayed flow of payments, loss of principle and in many cases results in legal costs as creditors may need to launch legal action in an attempt to recoup losses. The following are a few examples of credit risk.

1. Bonds

Bonds issued by governments, organizations and businesses are typically rated for their credit risk by organizations known as Bond Rating Agencies. The interest paid on a bond depends upon these ratings and the appetite for credit risk in financial markets.

2. Loans

Loans to organizations, businesses and individuals include a wide variety of financial products such as mortgages, lines of credit and credit cards. Loans may be secured or unsecured with a secured loan being based on the value of an asset that will be sold to pay the debt under certain conditions. Financial institutions that make loans may use a variety of credit rating agencies to calculate credit risk. Interest rates are usually based on such risks. For example, unsecured loans often have a higher interest rate than secured loans.

3. Accounts Receivable

Companies that sell things typically have customers that owe them money. These debts are known as accounts receivables. Customers have incentive to keep their money as long as possible and often try to delay payments. Customers who are in poor financial condition may delay payments for long periods of time even when legal actions are taken to recover funds. In some cases, customers will ultimately fail to pay due to bankruptcy or as the result of some dispute. According to accounting rules, companies must regularly judge the credit risk associated with their accounts receivable and recognize losses for doubtful accounts.


This is the complete list of articles we have written about risk.
AI Risk
Risk Avoidance
Brand Risk
Budget Risk
Business Risks
Change Risk
Compliance Risk
Concentration Risk
Cost Risk
Country Risk
Credit Risk
Demand Risk
Dread Risk
Economic Risk
Exchange Rates
Existential Risk
External Risk
Financial Risk
Force Majeure
Good Risk
Human Error
Risk Identification
Infinite Risk
Inflation Risk
Inherent Risk
Interest Rates
Internal Risks
Investing Risk
Legal Risk
Liquidity Risk
Model Risk
Moment Of Risk
Natural Disasters
Negative Risk
Operations Risk
Passive Risk
Personal Risk
Political Risk
Process Risk
Procurement Risk
Product Risk
Project Risk
Pure Risk
Quality Risk
Recession Risk
Risk Mitigation
Refinancing Risk
Regulatory Risk
Reputational Risk
Residual Risk
Resource Risk
Revenue Risk
Risk Appetite
Risk Aversion
Risk Examples
Risk Management
Risk Management Process
Risk Matrix
Risk Meaning
Risk Measurement
Risk Taking
Risk Tolerance
Risk Triggers
Risk vs Issue
Risk vs Opportunity
Risk vs Uncertainty
Risk-Reward Ratio
Seasonal Risk
Secondary Risk
Security Risk
Settlement Risk
Risk Sharing
Speculative Risk
Strategic Risk
Strategy Risk
Supply Risk
Systemic Risk
Tactical Risk
Taxation Risk
Technology Risk
Risk Transfer
Unforced Error
Upside Risk
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