Cut-Off Score
From Open Risk Manual
Revision as of 21:01, 11 September 2020 by Wiki admin (talk | contribs)
Definition
A Cut-Off Score is a numerical threshold (value) (also Acceptance Level) that is used to support the Credit Decisioning step of a Credit Origination process.
Usage
The value of a Credit Score produced by a Credit Scorecard is compared with the cut-off score and produces a binary indicator (Yes/No) which can then be used as-is to trigger a credit decision (e.g., reject / accept), in which case we are talking as a Hard Cut-Off, or prompt other management action
The selection of a cut-off score is crucial in balancing business objectives (e.g. for portfolio growth, profitability, competitive position) versus the firm's Risk Appetite. That balancing act is usually expressed as an optimization problem.
