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But taken with other factors, like ...
- what the site looks like
- is the site 'clean'
- how relevant the site is to your visitors
- how you heard about the site
- what linking policy the site has (do they link sensibly?)
... it can be useful information
Does the link you are about to link to help your users learn more about the product/service/information your site provides?
Does the link you are about to link have a robust thriving site?
Does the link have PR=whatever? forget about PR.. there are plenty of decent sites on the web that have low or no PR (maybe they are new sites). Make linking decisions for your end users, not for PR.
I keep seeing references to "bad neighborhoods" in posts but defining that term can apply to so many situations. Forget about "bad neighborhoods" and look at the site as it stands on its own. Does it link to other decent sites or a bunch of sites irrelevant to your own?
If the site benefits your end user, link to it. If you aren't sure, don't do it.
I'd strongly recommend a checklist of criteria - though I'm happy for you to disagree with mine :)
The most important thing to think about is usablity for your end users. Does the site you are about to link to enrich your user's online experience by linking them to an additional knowledge gateway?
You know your business better than anyone else so its a decision you have to make on your own based on what you know about your own business and what you think most benefits your end users experience.
Don't judge a site based on their PR, alexa ranking, trust score or whatever. Because some sites that don't benefit your user's experience might have decent ranking scores. The mindset "will linking to this site help my ranking in X search engine" is wrong.
There will be those that will argue with me and tell me that what I am telling you won't help your search rankings. Who said linking should be done as a search engine function?
As Yoda might say, "you must unlearn what you have learned".
At the end of the day I think you have to judge a site on it's overall content/quality value and then decide if that site benefits your end user's experience. Forget about how you think the site you are about to link to might affect your search rankings. If the site benefits your end users, you aren't going to get into trouble for linking to it. Linking decisions should be made based on what is best for your end users. Think of linking as a branding function, not a search function. As junk is filtered out of the search engines, sites that link as a branding function will maintain rankings.
Many seemingly harmless links can seriously damage your Google credibility, and 'relevancy to visitors' really is not a sufficient check, though it is probably the most important
just one more comment to keep this on topic.. agreed you can damage your credibility in Google if you link out to sites that aren't relevant to your end users but let me share some insight from my 10+ years of doing this work.. if you link out to a site irrelevant to your own either by accident or arrogance, G isn't going to penalize you immediately. Google is very good at determing an honest error from high volume irrelevant linking. I see it every day.
If you aren't linking in high volume to irrelevant sites, you have nothing to worry about. If you are actively exchanging links with other sites and you are concerned about staying in Google's graces, simply make your linking decisions based on what benefits your end user and keep your volume slow/natural. That means don't link out to or obtain links in volume that exceeds more than 25-50 links per day.
Here is a red flag you can add to your criteria list: If you find a decent site that benefits your end users and they have lots of quality content BUT they are linking out to junk, avoid linking to that site because you don't want to be associated with sites that have poor link strategy. You might even let the webmaster know politely why you won't link to his or her site.
I have only seen Google downgrade or penalize sites that link in extremely high volume to irrelevant sites. As long as you avoid that type of chicanery, you have nothing to worry about. Of course you also have to maintain quality regularly updated content but thats another discussion and I am trying to stay on topic here. Just wanted to remind you all its not all about links. Links are only one part of the equation.
It's all about links; your best bet is to use nofollow wherever you can - but there's no simple answer; experience is the best tool, and acting fast on suspicions is the best action.