What is a common method for evaluating a customer’s credit risk?

Using credit scoring models is a widely accepted method for evaluating a customer’s credit risk because it provides a quantitative assessment of the likelihood that a customer will default on their payment obligations. Credit scoring models typically take into account various factors such as the customer’s payment history, outstanding debts, length of credit history, types of credit in use, and other financial behaviors to generate a score. This score helps businesses make informed decisions regarding extending credit and managing accounts receivable.

In contrast, conducting customer satisfaction surveys focuses on understanding customer experiences and perceptions, which does not directly assess credit risk. Reviewing sales pitch effectiveness is primarily aimed at improving sales strategies and does not evaluate a customer’s financial reliability. Similarly, analyzing competitor pricing strategies relates to market competition rather than assessing the creditworthiness of customers. These alternative methods do not provide the systematic, financial analysis necessary to determine credit risk.