Business credit-scoring models suffer from several weaknesses. These include which of the following?
I. Credit-score models are not statistically sound tools to use in making a lending decision.
II. The appropriate weights on a credit-score model are likely to change unpredictably over time.
III. These models ignore nonquantifiable behavioral factors,such as a relationship with the bank and reputation.
IV. Credit-scoring models discriminate against minorities.

Question

Quizplus · Accepted Answer

While credit-scoring models have proven to be effective tools in evaluating creditworthiness, they do have limitations. However, choice (I) is incorrect as credit-score models are statistically sound tools when developed and implemented correctly. Choice (II) is accurate as the appropriate weights on a credit-score model will change over time to reflect the importance of different variables. Choice (III) is also accurate as credit-scoring models may not reflect nonquantifiable behavioral factors that could impact a borrower's creditworthiness. Choice (IV) is not entirely correct as credit-scoring models should not discriminate against minorities, but this can be an issue if certain variables that disproportionately affect minorities are included in the model. Thus, B is the best choice as it accurately identifies the limitations of credit-scoring models.

Business Credit-Scoring Models Suffer from Several Weaknesses