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What Is Credit Exposure?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 01 September 2016
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    Conjecture Corporation
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"Credit exposure" is a term used to identify the total amount of credit that a lender has extended to a debtor. This total amount may be represented by a single loan or involve multiple loans or lines of credit that the lender is willing to extend to the borrower. Lenders generally limit this amount based on the degree or risk associated with lending certain amounts to specific borrowers, seeking to provide financial services while still keeping the potential for a default on the part of those borrowers under a certain percentage.

One of the easiest ways to understand credit exposure is to consider the case of a typical homeowner who chooses to finance several debts through the same lender, such as a bank. In this scenario, the consumer may have a mortgage and a car loan through the same bank. Since a relationship is established, the debtor returns to the bank to apply for a personal loan. When this happens, the bank will look at the total amount of credit extended through all three of these debt obligations and determine the credit exposure risk that the institution assumes if that third obligation is approved. Typically, unless the credit rating, current debt load, and the income of the debtor are all considered sufficient to manage all three obligations with relative ease, the bank will limit its risk or exposure by denying the application for that personal loan.

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Most lenders are willing to take on greater levels of credit exposure based on higher credit ratings, higher income levels, and proven track records with settling past loans and other debts in a timely manner. Customers of this type can often be approved quickly, with the bank considering the risk to be acceptable even when the amount of the loan is significant. At the same time, an applicant who has good but not outstanding credit may or may not be able to obtain a loan over a certain amount, simply because the credit exposure that the lender takes on is not considered acceptable due to the increased risk of default.

Lenders may attempt to minimize credit exposure in different ways, such as selling active loans to other lenders. In some cases, evaluating shifts in a customer’s credit rating and adjusting the amount of an extended line of credit will also help to reduce the degree or risk or exposure that the lender carries. For consumers, making sure to pay all obligations on time, maintain a healthy credit rating, and in general manage financial resources with the highest degree of efficiency will help to keep credit exposure within reasonable limits and increase the potential for lenders to continue working with those consumers over the long-term.

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