Credit Exposure

Are you young? Do you have bad credit? Here's why you'll have a hard time getting a loan.

You go to a bank to borrow $10,000 to start a business. Your credit rating is 550. Not good. You're a serious default risk. Why on earth did you max out your first credit card on auction websites?

The bank doesn't want to give you ten grand. Because that loan is considered the “credit exposure” that the bank faces. This is the total amount of default risk you present to the borrower. They'd much rather have someone who has a 790 credit score with a strong repayment history. They're going to get the $10,000. You're going to get...a pep talk.

Credit exposure fluctuates. As a borrower pays off the loan, the credit exposure will match the remaining balance. Lenders may choose to reduce their credit exposure by hedging on different loans or using financial instruments, like credit swaps.

The general rule of lending is to have high credit exposure to creditworthy individuals with a low default risk. Banks may make attractive lending offers to individuals with high credit scores in order to diversify their credit exposure.