Credit risk managers analyze the risk of loan applicants defaulting on loans, using factors such as credit scores, income, and employment history. They determine whether to extend credit, how much to extend, and at what rate. The advent of electronic credit checks has made the underwriting process easier, and advanced managers can establish appropriate standards for issuing loans.
A credit risk manager analyzes the risk of a loan applicant defaulting on a loan. Risk managers may work for a bank, a private company that issues credit, a mortgage company or a credit card service provider. A credit card risk manager who has advanced in the field might also work for large corporations or lending institutions and create structural models to allow people to access risk quickly.
When a person takes out any type of loan, including a credit card, car loan, or mortgage, there is a risk that the person will default. Lenders, and specifically the credit risk manager, calculate default risk using several different factors. The risk level is then used to approve or deny the loan and set the interest rate.
Most lenders use a FICO score or another credit score from one of the three major credit bureaus – Equifax, Experian and TransUnion – to calculate a person’s risk. Income data, employment history and other related factors are also used to determine default risk. A credit manager evaluates all of these factors to determine whether to extend credit, how much to extend, and at what rate it should be extended.
A FICO score is in the triple digits, ranging between 300 and 850. Scores above 700 are considered relatively good and will qualify buyers for most prime loans. Lower scores may qualify borrowers for subprime loans only.
As FICO scores and credit scores become more popular, the role of a credit risk manager has changed in many industries. Traditionally, a complex underwriting process took place when someone borrowed money. This underwriting process involved reviewing detailed financial records.
Underwriting has become much easier with the advent of electronic credit checks. A credit risk manager can simply take someone’s credit report and determine the level of risk associated with that person’s loan. In some cases, the manager will only look at the score and corresponding table to determine the appropriate interest rate and credit line.
A credit risk manager who has advanced in his career can help establish the appropriate standards that credit managers and officers will use to issue a loan. For example, a credit risk manager might create an algorithm or spreadsheet that determines that a person with a certain credit score and income must always offer a specific dollar amount and interest rate. Lower level company employees can use this standard to extend or deny credit, rather than asking the manager to personally review all applicants to determine risk.
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