Developments in consumer credit risk assessment

Crook, J.N., Edelman, D.B. and Thomas, L.C. (2006) Developments in consumer credit risk assessment (Univeristy of Southampton Discussion Paper Series: Centre for Risk Research, CRR-06-09) Southampton, UK. University of Southampton 33pp.

Abstract

Consumer credit risk assessment involves the use of risk assessment tools to manage a borrower’s account from the time of pre-screening a potential application through to the management of the account during its life and possible write-off. The riskiness of lending to a credit applicant is usually estimated using a logistic regression model though researchers have considered many other types of classifier and preliminary evidence suggest support vector machines seem to be the most accurate. The training of a classifier on a sample of accepted applicants rather than on a sample representative of the applicant population seems not to result in bias though it does result in difficulties in setting the cut off. Profit scoring is a promising line of research and the Basel 2 accord has had profound implications for the way in which credit applicants are assessed and bank policies adopted.

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