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Questions and Answers
What do Probability of Default (PD) models predict?
What do Probability of Default (PD) models predict?
- The amount of credit to be granted
- The likelihood of making a payment on time
- The creditworthiness of an individual
- The likelihood of default (correct)
What is the primary function of Credit Reporting Agencies (CRAs)?
What is the primary function of Credit Reporting Agencies (CRAs)?
- To assign credit ratings
- To evaluate creditworthiness of individuals and businesses
- To collect and maintain credit information (correct)
- To provide credit scores to lenders
Which of the following is a major credit rating agency?
Which of the following is a major credit rating agency?
- Experian (correct)
- FICO
- TransUnion
- Equifax
What percentage of a FICO score is influenced by payment history?
What percentage of a FICO score is influenced by payment history?
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What type of credit scoring algorithm predicts the probability of default?
What type of credit scoring algorithm predicts the probability of default?
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What is the primary purpose of credit scoring algorithms?
What is the primary purpose of credit scoring algorithms?
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Which of the following is an example of a credit scoring model?
Which of the following is an example of a credit scoring model?
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Study Notes
Risk Assessment Models
- Used to evaluate the creditworthiness of individuals or businesses
- Types:
- Probability of Default (PD) models: predict likelihood of default
- Loss Given Default (LGD) models: predict loss in case of default
- Exposure at Default (EAD) models: predict outstanding balance at default
Credit Reporting
- Process of collecting and maintaining credit information on individuals and businesses
- Credit reports contain:
- Personal information
- Credit history (accounts, payments, credit inquiries)
- Public records (bankruptcies, foreclosures, tax liens)
- Credit reporting agencies (CRAs) collect and provide credit reports to lenders
Credit Rating Agencies
- Independent organizations that evaluate creditworthiness of individuals, businesses, and governments
- Assign credit ratings based on credit scoring models
- Major credit rating agencies:
- Equifax
- Experian
- TransUnion
FICO Scores
- Most widely used credit scoring model
- FICO scores range from 300 to 850
- Factors influencing FICO scores:
- Payment history (35%)
- Credit utilization (30%)
- Length of credit history (15%)
- Credit mix (10%)
- New credit (10%)
Credit Scoring Algorithms
- Mathematical models that analyze credit data to predict creditworthiness
- Types:
- Logistic regression: predicts probability of default
- Decision trees: segment borrowers based on credit characteristics
- Neural networks: complex models for advanced credit scoring
- Credit scoring algorithms used by credit reporting agencies and lenders to evaluate credit applications
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