A profit-based scoring system in consumer credit: making acquisition decisions for credit cards

R T Stewart ()
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R T Stewart: Federal Reserve Bank of Chicago

Journal of the Operational Research Society, 2011, vol. 62, issue 9, 1719-1725

Abstract: Abstract Consumer credit scoring is one of the most successful applications of quantitative analysis in business with nearly every major lender using charge-off models to make decisions. Yet banks do not extend credit to control charge-off, but to secure profit. So, while charge-off models work well in rank-ordering the loan default costs associated with lending and are ubiquitous throughout the industry, the equivalent models on the revenue side are not being used despite the need. This paper outlines a profit-based scoring system for credit cards to be used for acquisition decisions by addressing three issues. First, the paper explains why credit card profit models—as opposed to cost or charge-off models—have been difficult to build and implement. Second, a methodology for modelling revenue on credit cards at application is proposed. Finally, acquisition strategies are explored that use both a spend model and a charge-off model to balance tradeoffs between charge-off, revenue, and volume.

Keywords: finance; banking; consumer credit; credit scoring; risk; multi-objective (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (5)

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DOI: 10.1057/jors.2010.135

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