LO 33.4: Define and describe credit risk scoring model types, key variables, and applications.
A credit risk scoring model takes information about an applicant and converts it into a number for the purpose of assessing risk; the higher the number, the higher the probability of repayment by the borrower and the lower the overall risk. Credit scoring models facilitate the gathering of an enormous amount of information into a single automated process.
A credit risk scorecard will gather information from applications and credit bureau reports and weight it depending on the type of questions answered. The question/entry will ask for a specific characteristic like number of years with current employer, and the attribute will be the response (e.g., 10 years). Credit scoring models will determine positive and negative values and weight each attribute according to past history and the associated probability of repayment.
Three model types exist in regard to scoring applications for consumer credit:
Credit bureau scores: this refers to an applicants FI CO score, and is very fast, easy, and
cost effective to implement and evaluate. Scores will typically range from a low of 300 to a high of 830, with higher scores associated with lower risk to the lender and lower interest rates for the borrower.
2018 Kaplan, Inc.
Topic 33 Cross Reference to GARP Assigned Reading – Crouhy, Galai, and Mark, Chapter 9
Pooled model: this model, built by outside parties, is more costly than implementing a credit bureau score model; however, it offers the advantage of flexibility to tailor it to a specific industry.
Custom model: created by the lender itself using data specifically pulled from the lenders own credit application pool. This model type allows a lender to evaluate applicants for their own specific products.
Every individual with a credit history will have credit files containing the following information:
Personal (identifying) information which doesnt factor into scoring models.
Records of credit inquiries when a file is accessed. Requests for new credit will be visible
to credit grantors.
Data on collections, reported by entities that provide credit or agencies that collect
outstanding debts. Legal (public) records on bankruptcies, tax liens, and judgments.
Account and trade line information gathered from receivables information sent to credit
bureaus by grantors.
M o r t g a g e C r e d i t A s s e s s m e n t