CCM Credit Scoring & Rating Systems 1 — Questions and Answers
Question 1: What is the numerical range of FICO credit scores?
- 100–500
- 0–999
- 300–850 (Correct answer)
- 250–900
Correct answer: 300–850
FICO scores range from 300 to 850, with higher scores indicating lower credit risk to lenders.
Question 2: What is the Altman Z-Score model primarily used to predict?
- A company's future stock price movement
- The probability of corporate bankruptcy within two years (Correct answer)
- The creditworthiness of individual consumers
- A company's projected revenue growth
Correct 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.
Question 3: Which factor carries the greatest weight in calculating a FICO credit score?
- Length of credit history
- Types of credit used
- New credit inquiries
- Payment history (Correct answer)
Correct answer: Payment history
Payment history accounts for approximately 35% of a FICO score, making it the single most heavily weighted component.
Question 4: Dun & Bradstreet's PAYDEX score for business credit ranges from:
- 300 to 850
- 0 to 999
- 1 to 10
- 1 to 100 (Correct answer)
Correct 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.
Question 5: What is the primary purpose of a credit scoring model in commercial credit management?
- To automate accounts payable processing
- To determine the fair market value of a company
- To objectively quantify and rank the risk of extending credit to a customer (Correct answer)
- To calculate the appropriate interest rate on revolving credit facilities
Correct 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.
Question 6: In the Altman Z-Score model, a score above 3.0 places a company in which zone?
- The distress zone, indicating high bankruptcy probability
- The grey zone, requiring further analysis
- The safe zone, indicating low bankruptcy probability (Correct answer)
- The default zone, indicating imminent insolvency
Correct 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.
Question 7: Which of the following is NOT one of the three major U.S. consumer credit bureaus?
- Equifax
- Dun & Bradstreet (Correct answer)
- TransUnion
- Experian
Correct answer: Dun & Bradstreet
Dun & Bradstreet specializes in business credit reporting; the three major consumer credit bureaus are Equifax, TransUnion, and Experian.
CCM Credit Scoring & Rating Systems 1
What is the numerical range of FICO credit scores?