Credit Scoring & Rating Systems Flashcards

What is the numerical range of FICO credit scores?

Answer: 300–850

FICO scores range from 300 to 850, with higher scores indicating lower credit risk to lenders.

What is the Altman Z-Score model primarily used to predict?

Answer: The probability of corporate bankruptcy within two years

Developed by Edward Altman in 1968, the Z-Score combines multiple financial ratios to predict the likelihood of corporate bankruptcy.

Which factor carries the greatest weight in calculating a FICO credit score?

Answer: Payment history

Payment history accounts for approximately 35% of a FICO score, making it the single most heavily weighted component.

Dun & Bradstreet's PAYDEX score for business credit ranges from:

Answer: 1 to 100

The PAYDEX score ranges from 1 to 100, where a score of 80 indicates invoices are paid exactly on time and higher scores reflect early payment.

What is the primary purpose of a credit scoring model in commercial credit management?

Answer: To objectively quantify and rank the risk of extending credit to a customer

Credit scoring models provide an objective, consistent method to quantify credit risk, enabling credit managers to make more uniform and data-driven decisions.

In the Altman Z-Score model, a score above 3.0 places a company in which zone?

Answer: The safe zone, indicating low bankruptcy probability

An Altman Z-Score above 3.0 indicates the company is in the 'safe zone' with a low probability of bankruptcy in the near term.

Which of the following is NOT one of the three major U.S. consumer credit bureaus?

Answer: Dun & Bradstreet

Dun & Bradstreet specializes in business credit reporting; the three major consumer credit bureaus are Equifax, TransUnion, and Experian.