7 Questions
What do Probability of Default (PD) models predict?
The likelihood of default
What is the primary function of Credit Reporting Agencies (CRAs)?
To collect and maintain credit information
Which of the following is a major credit rating agency?
Experian
What percentage of a FICO score is influenced by payment history?
35%
What type of credit scoring algorithm predicts the probability of default?
Logistic regression
What is the primary purpose of credit scoring algorithms?
To predict creditworthiness
Which of the following is an example of a credit scoring model?
FICO
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
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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