Does not help your credit score là gì

What Is Credit Exposure?

Credit exposure is a measurement of the maximum potential loss to a lender if the borrower defaults on payment. It is a calculated risk to doing business as a bank.

For example, if a bank has made a number of short-term and long-term loans totaling $100 million to a company, its credit exposure to that business is $100 million.

Understanding Credit Exposure

Banks seek to limit their credit exposures by extending credit to customers with high credit ratings, while avoiding clients with lower credit ratings.

Key Takeaways

• Credit exposure is one component of credit risk.
• It indicates the maximum loss to a lender if a borrower defaults on a loan.
• The credit rating system was created to help lenders control credit exposure.

If a customer encounters unexpected financial problems, a bank may seek to reduce its credit exposure to mitigate the loss that may arise from a potential default. For instance, a credit card user who misses a payment may be forced to pay a penalty fee and a higher interest rate on future purchases. This practice reduces the overall credit exposure to the card issuer.

How Lenders Control Credit Exposure

Lenders have a number of ways to control credit exposure. A credit card company sets credit limits based on its evaluation of a borrower's likely ability to repay the sum owed.

For example, it may impose a $300 credit limit on a college student with no credit history until the person has a proven track record of making on-time payments. The same credit card company may be justified in offering a $100,000 limit to a high-income customer with a FICO score above 800.

In the first instance, the card company is reducing its credit exposure to a higher-risk borrower. In the latter scenario, the company is nurturing its business relationship with a wealthy client.

Credit Default Swaps

A more complex method of limiting credit exposure is purchasing credit default swaps. A credit default swap is an investment that effectively transfers the credit risk to a third party. The swap buyer makes premium payments to the swap seller, who agrees to assume the risk of the debt. The swap seller compensates the buyer with interest payments, while also returning the premiums if the borrower defaults.

Credit default swaps played a major role in the financial crisis of 2008, after sellers misjudged the risk of the debt they were assuming when issuing swaps on bundles of subprime mortgages.

Credit Exposure vs. Credit Risk

The terms credit exposure and credit risk are often used interchangeably. However, credit exposure actually is a component of credit risk.

The credit default swap was designed as a way to limit credit exposure. It didn't work out that way during the 2007-2008 financial crisis.

Other components include the probability of default, which estimates how likely it is that the borrower will be unable or unwilling to repay the debt, and recovery rate, which quantifies the portion of the loss that is likely to be recovered through bankruptcy proceedings or debt collection efforts.

Skip to main content

You are probably aware that when you apply for a loan or credit card, the potential creditor checks or ‘pulls’ your credit report and score. But did you know there are other situations, like a prospective employer reviewing your credit report, that also register as a credit check? Here’s what you need to know about the two types of credit checks, and the different ways they affect your credit score.

What is a hard credit check?

A hard credit check is when a lender pulls your credit report because you’ve applied for new credit, such as a credit card, a car loan, a home loan or an increase to an existing line of credit. Hard credit checks can affect your credit score (the most common is your FICO® Score) because seeking new credit can make you seem like more of a risk to lenders, who may worry about your ability to pay back the debt.

Hard credit inquiries don’t hurt much

Here’s the good news: For many people, the damage from hard checks is minor, usually less than five points off your credit score. One or two credit checks will not significantly harm your credit.

Don’t let concern about credit checks keep you from shopping around for the best deal on auto loans, student loans or mortgages. Hard credit checks that occur for specific items like these, and that happen within a certain time frame—FICO calls them shopping periods—are usually treated as a single inquiry. While each lender may use a different formula to calculate a shopping period, it’s typically 14–45 days.

When to be cautious

New lines of credit represent only 10 percent of your credit score, according to myFICO.com, but that doesn’t mean you should rack up hard inquiries without giving it a second thought.

• Although credit checks are factored into your credit score for only 12 months, they remain on your credit report for two years.
• Credit checks can have a greater impact for someone with a short credit history and few accounts, compared with someone who has a long history and wide range of credit experience.
• To a lender reviewing your credit report, many hard credit checks in a short time may indicate higher credit risk because it could appear that you are trying to get a lot of credit quickly. (The exception is if you rate shop for a car, student or home loan during a short period.)
• Drops in your credit score can result in higher interest rates when you borrow, which means you pay more over the life of a loan.

What is a soft credit check?

A soft credit check is when your credit report is pulled but you haven’t applied for credit. For example: Insurance companies or potential landlords may look at your credit report to assess risk; potential employers may do background checks. Credit card companies can also pull a soft copy of your credit to service and manage any existing relationships you may have with them. Soft checks do not affect your credit score or show up on your credit report.

Protect your credit

To keep your credit score healthy, avoid hard checks when you can. Try to say no to those store credit cards offered to you at checkout if they don’t make sense in your larger financial picture. If you rate shop for a car, student or home loan, it’s best to keep it within a 14- to 45-day window so multiple credit checks are recorded as one. Also keep an eye on your credit report. If you see a hard check you did not initiate, take action to protect yourself from identity theft.

More from Bank of America