Credit Risk Assessment and Scoring
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Questions and Answers

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)?

  • 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?

  • Experian (correct)
  • FICO
  • TransUnion
  • Equifax

    • What percentage of a FICO score is influenced by payment history?

    <p>35%</p> Signup and view all the answers

    What type of credit scoring algorithm predicts the probability of default?

    <p>Logistic regression</p> Signup and view all the answers

    What is the primary purpose of credit scoring algorithms?

    <p>To predict creditworthiness</p> Signup and view all the answers

    Which of the following is an example of a credit scoring model?

    <p>FICO</p> Signup and view all the answers

    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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    Description

    Test your knowledge of credit risk assessment models, credit reporting, credit rating agencies, FICO scores, and credit scoring algorithms. Learn how to evaluate creditworthiness and predict default.

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