What is the relationship between credit risk and customer credit assessment?

The relationship between credit risk and customer credit assessment is fundamentally tied to how businesses evaluate the ability of customers to repay borrowed funds or make purchases on credit. Customer credit assessment involves evaluating an individual's or entity's creditworthiness based on financial history, existing debts, income levels, and other relevant factors. This assessment aims to determine the likelihood that the customer will meet their obligations without defaulting.

When a business conducts a thorough credit assessment, it significantly contributes to reducing credit risk, which is the potential that a borrower will be unable to make required payments. By understanding the creditworthiness of customers through diligent assessment practices, businesses can make informed decisions about extending credit, setting appropriate terms, and limiting exposure to bad debts. This proactive approach minimizes the chances of encountering losses due to defaults, thereby decreasing overall credit risk.

In contrast, other viewpoints suggest that credit risk and customer credit assessment do not influence each other directly or that they are synonymous terms. However, these perspectives overlook the critical function of credit assessment as a tool to mitigate credit risk.