A comparison of data mining techniques for credit scoring in banking: A managerial perspective

Abstract

Credit scoring is a very important task for lenders to evaluate the loan applications they receive from consumers as well as for insurance companies which use scoring systems today to evaluate new policyholders and the risks these prospective customers might present to the insurer. Credit scoring systems are used to model the potential risk of loan applications which have the advantage of being able to handle a large volume of credit applications quickly with minimal labour thus reducing operating costs and they may be an effective substitute for the use of judgment among inexperienced loan officers thus helping to control bad debt losses. This study explores the performance of credit scoring models using traditional and artificial intelligence approaches: discriminant analysis logistic regression neural networks and classification and regression trees. Experimental studies using real world data sets have demonstrated that the classification and regression trees and neural networks outperform the traditional credit scoring models in terms of predictive accuracy and type II errors. © 2010 Elsevier B.V. All rights reserved.