Wednesday, March 18, 2009

credit scoring (2)

credit scoring models make assumptions about how common characteristics in statistical populations affect likely borrower behaviour.but any change in potential borrower behaviour that is not picked up quickly can make the base assumptions invalid and allow large numbers of inappropriate borrowings to be approved.IN the US,what had happened was that there had been a major shift in the attitude of individual Americans towards bankruptcy .Historically this had carried agreat social stigma that people wanted to avoid .Quite suddenly a different attitude became fashionable ;the stigma was removed ,and borrowers began to see bankruptcy as merely a sensible piece of financial planning . personal bankruptcy rates soared , hitting credit card companies very heavily with the consequent losses.
credit scoring models need a homogenous statistical base to work effectively ; in other words ,lots of borrowers with similar characteristics who can be readily compared to one anther and for which common conclusions can be deduced .Homogenous populations are available where personal borrowers are concerned but things immediately become more difficult where business borrowers are concerned

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