When does Ford Credit recognize bad debt expense associated with a new car loan? Every individual has a credit score (Links to an external site.), which is an approximate measure of the risk of loan default to potential lenders. Credit scores range from about 300 850, with 850 being the best credit score possible. This credit score is a combination of several categories of history about the individual, including length of credit history, amounts owed, payment history, types of credit in use, and new credit. A general rule of thumb is that a good credit score is above approximately 700 (Links to an external site.). In 2019, buyers with credit scores of less than 500 (poor credit risks) made up more than 27 percent of loans for new vehicles (see Bloomberg article entitled Good Job is Good Enough as Subprime Car Buyers Lift Sales (Links to an external site.)). This 27 percent compares with 25 percent in 2018 and 18 percent in 2017. Questions 1. Why do you think that lenders are making car loans to people with lower credit scores? 2. What does the term default mean as it relates to loans? 3. Assume that Ford Credit makes a car loan on a new Ford Fusion sold to a customer in 2019. Assume that this borrower defaults on the loan in 2020. When will Ford Credit recognize the bad debt expense associated with this car sale/loan? Explain. 4. If Ford Credit is extending credit to borrowers with lower credit scores, what would you expect to see happen to Ford Credits allowance for bad debts balance (i.e., would it increase or decrease)? Why?

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