Credit scoring means applying a statistical model to assign a risk score to a credit application. Credit scoring techniques assess the risk in lending to a client.
They not only identify “good” applications and “bad” applications (where negative behaviour, e.g., default, is expected) on an individual basis, but also they forecast the probability that an applicant with any given score will be “good” or “bad”.
These probabilities or scores, along with other business considerations, such as expected approval rates, profit, churn, and losses, are then used as a basis for decision making.
The business questions answered are:
- Who should get credit?
- How much credit they should receive?
- Which operational strategies will enhance the profitability of the borrowers to the lenders?