Credit Scoring 101

Credit Scoring 101 PowerPoint PPT Presentation


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Credit Scoring 101

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1. Credit Scoring 101 Federal Trade Commission July 22, 1999

2. 2 91821plm. ppt Topics 1. The nature of the credit decision 2. Statistical vs. judgmental decisions 3. Scoring system development 4. Types of credit scoring systems 5. Credit bureau scores 6. Legal and policy issues

3. 3 91821plm. ppt

4. 4 91821plm. ppt Two types of credit decisions

5. 5 91821plm. ppt The credit decision Scoring vs. judgmental Both methods Assume that the future will resemble the past Compare applicants to past experience Aim to grant credit only to acceptable risks

6. 6 91821plm. ppt The credit decision Scoring vs. judgmental (cont.) Added value of scoring Defines degree of credit risk for each applicant Ranks risk relative to other applicants Allows decisions based on degree of risk Enables tracking of performance over time Permits known and measurable adjustments Permits decision automation

7. 7 91821plm. ppt Evaluating the credit applicant

8. 8 91821plm. ppt Scorecard

9. 9 91821plm. ppt Information value

10. 10 91821plm. ppt Developing population odds

11. 11 91821plm. ppt Odds development

12. 12 91821plm. ppt Odds development

13. 13 91821plm. ppt Odds development

14. 14 91821plm. ppt Interrelationships

15. 15 91821plm. ppt Interrelationships

16. 16 91821plm. ppt Divergence

17. 17 91821plm. ppt Credit score = odds (risk)

18. 18 91821plm. ppt IT’S BETTER TO COUNT, THAN TO GUESS!!!

19. 19 91821plm. ppt Source Specific creditor Custom scorecards Other creditor / portfolio Borrowed scorecards Multiple creditors Pooled data scorecards Prior scorecard experience Launch scorecards

20. 20 91821plm. ppt Sources of information Credit reports Application data Prior experience Demographics Billing file Deal terms

21. 21 91821plm. ppt Decision areas Solicitations New applications Account management Credit line Authorization Collections Reissue Cross-sell Keep / sell

22. 22 91821plm. ppt Performance definitions Delinquency ("Good-Bad") Bankruptcy Response Attrition/Prepayment Profitability Collections Revenue

23. 23 91821plm. ppt Scoring in mortgage lending “Generic” bureau scores Mortgage-specific bureau scores Comprehensive mortgage scores Differences from other types of credit Recommended usage

24. 24 91821plm. ppt

25. 25 91821plm. ppt Previous credit performance What types of information does this include? Trade lines Public records Collection segments What questions are answered by this information? Recency – How long ago was the last delinquency? Severity – What level of delinquency was reached? Prevalence – How many credit obligations have been delinquent?

26. 26 91821plm. ppt Previous credit performance Example information Number of months since most recent 60 day or higher level of delinquency reached Highest level of delinquency reached in the last year Number of months since most recent derogatory public record

27. 27 91821plm. ppt

28. 28 91821plm. ppt Current level of indebtedness Example information Average balance on revolving trade lines Ratio of revolving debt to total revolving limits Percentage outstanding on open installment loans

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38. 38 91821plm. ppt Legal and Policy Issues Overt discrimination Disparate treatment Overrides Quality of assistance Disparate impact: myth vs. data

39. 39 91821plm. ppt LMI Study Acceptance rates Total scorecard

40. 40 91821plm. ppt LMI Study Odds vs. score Total Scorecard

41. 41 91821plm. ppt LMI Study Population differences

42. 42 91821plm. ppt LMI Study Maintain bad rate; compare acceptance rates

43. 43 91821plm. ppt LMI Study Maintain acceptance rate; compare bad rates

44. 44 91821plm. ppt HMA Study Defined high minority areas (HMA) Census bureau data used HMA consumers who reside in zip codes with 70+% black and / or hispanic population These areas account for 8.3% of the US population 6.7% of all credit records

45. 45 91821plm. ppt HMA Study Income is correlated with HMA

46. 46 91821plm. ppt HMA Study Comparison of score distributions

47. 47 91821plm. ppt HMA Study Comparison of odds versus score

48. 48 91821plm. ppt HMA Study Population differences

49. 49 91821plm. ppt HMA Study More predictive score for minorities?

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