Credit scoring for profitability objectives

Finlay, Steven

doi:10.1016/j.ejor.2009.05.025

Cited by 55 publications

(33 citation statements)

References 22 publications

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“…Thus a guideline to select the most appropriate classification model as well as to calculate an adequate cutoff value is still missing if it comes to apply credit scoring in a profit-oriented setting, which has already been advocated by e.g. Thomas (2009) and Finlay (2010).…”

Section: Introductionmentioning

confidence: 99%

Development and application of consumer credit scoring models using profit-based classification measures

Verbraken¹,

Bravo²,

Weber³

et al. 2014

European Journal of Operational Research

148

110

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This paper presents a new approach for consumer credit scoring, by tailoring a profit-based classification performance measure to credit risk modeling. This performance measure takes into account the expected profits and losses of credit granting and thereby better aligns the model developers' objectives with those of the lending company. It is based on the Expected Maximum Profit (EMP) measure and is used to find a trade-off between the expected losses -driven by the exposure of the loan and the loss given default -and the operational income given by the loan. Additionally, one of the major advantages of * NOTICE: this is the author's version of a work that was accepted for publication in the European Journal of Operational Research. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. Please cite this paper as follows: Verbraken, T., Bravo, C., Weber, R. and Baesens, B. (2014) Development and application of consumer credit scoring models using profit-based classification measures. European Journal of Operational Research. In Press. Available Online: http://www.sciencedirect.com/ science/article/pii/S0377221714003105 † Email Addresses: thomas.verbraken@kuleuven.be, crbravo@utalca.cl (corresponding), rweber@dii.uchile.cl, bart.baesens@kuleuven.be 1 using the proposed measure is that it permits to calculate the optimal cutoff value, which is necessary for model implementation. To test the proposed approach, we use a dataset of loans granted by a government institution, and benchmarked the accuracy and monetary gain of using EMP, accuracy, and the area under the ROC curve as measures for selecting model parameters, and for determining the respective cutoff values. The results show that our proposed profit-based classification measure outperforms the alternative approaches in terms of both accuracy and monetary value in the test set, and that it facilitates model deployment.

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Section: Introductionmentioning

confidence: 99%

Development and application of consumer credit scoring models using profit-based classification measures

Verbraken¹,

Bravo²,

Weber³

et al. 2014

European Journal of Operational Research

148

110

View full text Add to dashboard Cite

show abstract

“…Anecdotal evidence suggests that small business owners and start-ups frequently use personal consumer credit cards to pay for business expenses. As a result of such actions, lenders commonly use a mix of different customer behaviour models to assist lending decisions and set terms and conditions attached to the loan product (Finlay, 2010). Such information is also valuable to lenders' marketing departments when selecting profitable customers for additional products or calculating to what extent to incentivise increased account usage.…”

Section: Introductionmentioning

confidence: 99%

“…There is no standard way to define the length of the performance and outcome windows. The recommendations in the literature typically range from 6-to-24-months (see Thomas et al, 2001Thomas et al, , 2002Mays, 2004;Thomas, 2009;van Gestel and Baesens, 2009). Practitioners generally use a number of different candidates (e.g.…”

Section: Introductionmentioning

confidence: 99%

A window of opportunity: Assessing behavioural scoring

Kennedy¹,

Namee²,

Delany³

et al. 2013

Expert Systems with Applications

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“…In previous studies, individuals were scored according to their expected cumulative profits during the forecast period (Andreeva et al, 2007;Finlay, 2008;Ma et al, 2009;Finlay, 2010;Lieli and White, 2010). The cited papers share a common feature: all of them use monetary based measures.…”

Section: Introductionmentioning

confidence: 99%