Behavioral Scoring
Contents
Definition
Behavioral Credit Scoring denotes Credit Scoring Models for existing clients of a firm (as opposed to new clients) for which the scoring agent has accumulated performance history.
Development
The main additional information available for existing clients is the internal monitoring history. This may consist of transactional characteristics such as:
- Repayment behaviour (Delays, Reminders)
- Purchasing information
- Utilization information (Balances, Transaction Frequency, Limit Breach)
The development of a behavioural scorecard may follow the same general principles as a Credit Scorecard as a one-period classification problem but given the continuous monitoring other approaches (e.g. Markov Chains) are also possible.
Usage
Accounts can be scored monthly or quarterly. This additional information typically allows more accurate prediction of the odds of an existing account becoming delinquent. In turn the more accurate risk profile may enable the firm to improve efficiency:
- Faster approval for new credit
- Pre-approved credit
- Targeted marketing of products
- More accurate risk pricing
In the context of Credit Portfolio Management behavioural scoring may improve:
- Customer Segmentation
- Provisioning accuracy (especially in IFRS 9 context
