Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
552519 | Decision Support Systems | 2014 | 9 Pages |
•We develop an approach to estimate credit customers' profitability and default risk.•We build a transactor/revolver scorecard and Good/Bad scorecard over the revolvers.•We compare this approach with the standard approach in credit scoring.•Results show that our approach is similar to the standard method in predicting default.•Results indicate that our approach is more accurate in estimating profitability.
In consumer lending the traditional approach is to develop a credit scorecard which ranks borrowers according to their risk of defaulting. Bads have a high risk of default and Goods have a low risk. To maximise the profitability of credit card customers, a second classification between revolvers and transactors becomes important. Building a transactor/revolver scorecard together with a Good/Bad scorecard over the revolvers, gives rise to a risk decision system whose ranking of risk is comparable with the standard approach. The paper develops a profitability model of card users including the transactor/revolver score leads. This gives more accurate profitability estimates than models which ignore the transactor/revolver split.