Credit Score vs. Credit Risk Assessment: What’s The Difference?

by Ajay Singh Financial Advisor

There will be financial shortcomings, no matter how well you have planned your finances. Last-minute requirements and emergencies do pop up out of nowhere. You need to bridge the gap with debt if you are having insufficient funds. The moment you decide to take a loan, terms like credit risk assessment and credit score comes to your mind. These terms are interchangeable and help in assessing the borrowers' ability to repay back the loan amount. Credit score and credit risk assessment may seem similar, but they are very different. Though they work on the same thing, you can find it very different to place both of them in the same pot. If you are about to take a loan and feeling confused about the terms like credit score and credit risk assessment, then run through this guide that helps you in and out.

Credit score

A credit score is a basic score similar to your academic scores that had the ability to decide your future. This score will decide your financial journey and speaks about your financial history to the loan provider. Taken into account, all the financial and credit history, a score is given to you. It is a three-digit score and checked by every loan provider, the day you put on your loan application. Considering the score, your loan is either approved or rejected. There is a various range of credit score, and a score above 749 is taken as excellent. The better your credit report, the fewer issues you will face while borrowing. Keeping up a good score is very important so that you can borrow anytime on your own terms. By paying bills on time, debt consolidation, keeping no outstanding and stop taking multiple loans, you can surely get a good credit score. It is important to have a good one, to show your creditworthiness to your loan provider.

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Credit risk assessment

A credit risk assessment estimates the amount of loss generated from the borrower’s failure to pay back the loan or any kind of debt. In short, it refers to the risk that the loan provider will not get back the principal amount and interest rate offered to the loan provider. The credit risk assessment is done to judge the overall ability of the borrower, as to whether he is capable of paying or not. Things like credit history, credit score, capital, collateral, and conditions of the loan are taken into account. Credit risk assessment is a new and better way of checking the creditworthiness of the borrower before offering them any kind of loan. The moment the loan provider feels any sort of risk in getting back the loan amount, he rejects the application. The credit risk assessment works on; higher the risk associated the higher will be the rate of interest. When there is no risk or very little risk, the rate of interest is always less. If you are having better credit ratings, you can surely attract any kind of interest rate and there will be room for negotiation.

Wrapping up

Credit score and credit risk assessment are very essential factors for the borrower. They are subject to change by past financial history and other credit happenings. If you are aiming for an approved loan at a low rate of interest, you must check credit score and stay updated. Keep improving both, as it will be reflected during the time of loan application.