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What is Credit Risk and How is It Calculated?

6 min read

Published April 4, 2025

Table of contents

Key Takeaways

Lenders use credit risk to estimate how likely an applicant is to repay their debts.
The factors that determine credit risk include credit history, total debt, and income.
You may improve your credit risk by taking steps that also improve your credit score, like paying bills on time and minimizing your credit utilization ratio.

When you apply for any type of loan—from credit cards to mortgages and beyond—your lender typically has to estimate your likelihood of repaying your debt. That’s where credit risk comes in.

Credit risk measures a borrower’s likelihood of failing to repay a loan and losing a lender’s money. If someone has a lot of debt or a rocky credit history, they could represent a financial risk to the lender. There’s no way to know for certain whether an applicant will pay back what they borrow. Instead, lenders often rely on several risk factors to assess creditworthiness and make lending decisions.

How credit risk is evaluated

To determine a person’s credit risk, lenders often assess risk factors called the five Cs of credit: character, capacity, collateral, capital, and conditions. However, different types of credit, like a mortgage, an auto loan, or a credit card, typically weigh each factor differently. You might prioritize certain factors depending on your needs. The following insights could help with credit card applications.

How credit history impacts credit risk

Lenders use your credit history to help assess your “character” as part of credit risk analysis. They look to your past habits to guess how you’ll manage debt in the future. As you use your credit card or loans, your financial institution typically reports your credit activity to the three credit bureaus. Each credit bureau then builds a credit report. If your credit report shows a pattern of missed payments or several new credit card accounts in a short period, lenders may consider you a high-risk borrower.

Just as your credit history impacts credit risk, credit risk affects credit card eligibility. Applying for multiple cards to find one you qualify for could hurt your credit score. Instead, you can easily see if you’re pre-approved for a Discover Card with no impact to your credit score.¹

See If You’re Pre-Approved

Debt-to-income ratio and credit risk

Your debt-to-income ratio (DTI) determines your “capacity” or financial ability to repay debts. DTI measures the percentage of your monthly gross income taken up by debt. Carrying big credit card balances compared to your credit limit or using a lot of your available credit could increase your DTI.

The higher your DTI, the lower your capacity. A significant DTI signals to lenders that you may not have the cash flow to manage your existing debt obligation. Some banks and other financial institutions may not accept borrowers with DTIs over a certain percentage to help them avoid potential risk.

How to improve your credit risk

Many steps that increase your credit score could also help you minimize your credit risk. Credit risk analysis overlaps in some ways with credit scoring models. Responsible financial habits show lenders you’re a reliable borrower, improving your creditworthiness and lowering your risk.

To reduce your DTI, you could pay down your balances. If you have the available cash flow, you may want to make a few large payments on your credit card accounts to reduce your credit usage–otherwise known as your credit utilization ratio. It’s also vital to make payments on time or early each month.

If you don’t have much of a credit history or are working to recover your credit, responsible use of a secured credit card could also help improve your credit risk.

Did you know?

If you want to build your credit history² with a secured credit card from Discover, you’ll need collateral, another C of credit. Secured cards require a refundable security deposit, which will equal your credit line, of at least $200.³ With a secured card, you can improve your credit risk while earning rewards.

Learn More

How credit risk can impact your credit terms

Borrowers with a low credit risk may qualify for more credit card options and better terms. Credit card issuers often consider your credit risk when determining your credit limit, for example. If you’ve previously paid bills late or missed payments, or if you’re already using most of your available credit, a credit card company may assume higher risk if they offer you a line of credit. You may still be approved for a credit card, but the issuer might offer a lower credit limit to minimize their credit exposure.

Credit risk could influence other aspects of your credit card, as well. Card issuers may charge you a higher interest rate to offset missed payments and incentivize you to pay on time. On the other hand, with a low credit risk, you may qualify for cards with a lower interest rate or a more robust rewards program.

To navigate credit risk management, it’s important to understand how financial institutions determine potential risk. Like a credit score, your credit risk changes over time with your behavior. Healthy credit habits could quickly transform a “high-risk” borrower into a “low-risk” one.