Credit Scorecards
Credit scorecards are the UK’s version of credit scores/credit ratings.
A credit scorecard is a mathematical model which attempts to quantify how likely a borrower is to display aides lenders when they are approving or denying credit applications. The most commonly used and simplest scorecard is a binary scorecard – this has two outcomes (1 or 0) which represent absolutes, an example would be bad debt or no bad debt. When this scorecard is run against a future debitor (somebody seeking credit) it will come back with either “bad debt” (this person is likely to incur bad debt, it’s important to note that likely can be whatever the lender tests for – so you might only be a 10% chance of becoming bad debt – yet you’ll still go into this category) or “no bad debt” (you are unlikely to incur bad debt).
More complex scorecards are becoming widespread in the credit industry with methods used included regression analysis, which rather than returning an absolute statement return a range of values (e.g the amount of bad debt this customer might incur). For example the amount of bad debt a customer might incur.
The most commonly used scorecard analysis methods used are as follows:
- Hazard Rate Modeling
- Reduced Form Credit Models
- Weight Of Evidence Models
- Linear Regression Analysis
- Logistic Analysis
The big differences in how these methods vary is the assumptions which are required about explanatory variables and the ability to model binary or continuous outcomes.
The credit industry and credit scorecards in the UK is regulated by the FSA (financial services authority) in accordance with Basel II regulations.