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IMA Journal of Management Mathematics 2001 12(1):89-103; doi:10.1093/imaman/12.1.89
© 2001 by Institute of Mathematics and its Applications
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Time will tell: behavioural scoring and the dynamics of consumer credit assessment

L. C. Thomas1, J. Ho2 and W. T. Scherer3

1 School of Management, University of Southampton, Southampton, SO17 1BJ, UK 2 Department of Business Studies, University of Edinburgh, Edinburgh, UK 3 Department of Systems Engineering, University of Virginia, Charlottesville, VA 22903, USA

This paper discusses the use of dynamic modelling in consumer credit risk assessment. It surveys the approaches and objectives of behavioural scoring, customer scoring and profit scoring. It then investigates how Markov chain stochastic processes can be used to model the dynamics of the delinquency status and behavioural scores of consumers. It discusses the use of segmentation, mover–stayer models and the use of second- and third-order models to improve the fit of such models. The alternative survival analysis proportional hazards approach to estimating when default occurs is considered. Comparisons are made between the ways credit risk is modelled in consumer lending and corporate lending.

Keywords: behavioural scoring; Markov chains; survival analysis; credit risk modelling

Received 27 February 2001. Accepted 15 August 2001.


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