What are credit scores? From whence do they come? How are they used, and by whom? Why should I care? How can I use them to my advantage? What actions will most help my score? We’ll provide a broad context and rationale for credit scoring as we offer answers to these questions.
Briefly, your personal characteristics, employment history, and financial choices over time each generate attributes, which are numeric measurements that contribute to your credit report. A company called FICO popularized credit scoring when credit cards became popular back in the 1960s, helping many overwhelmed banks to automate credit card application decisions.The formulae used at FICO are proprietary and well-kept secrets, but the scorecard is known to be constructed as weighted sum of your payment history score, credit utilization score, the length of your credit history, any recently issued credit, and your portfolio of credit types. Each of these five component scores is derived from your Credit Report.
Perhaps the best way to understand credit scores is to build a scorecard. We’ll walk through that process using a publicly-available dataset of how previous loan decisions turned out, and conclude by citing emerging trends.
There are many statistical strategies for generating credit scores, and some entail complicated mathematical considerations, but we will focus on an intuitive decision tree model that is easy to apply using freely-available open-source software (R), very intuitive to interpret, and nonetheless highly competitive with other models in predicting which loans will be repaid and which will not.
To summarize, this workshop provides hands-on training for understanding:
Jerry Platt, Ph.D., is Emeritus Dean and Professor of Finance at San Francisco State University. Most recently, he developed and taught courses in applied analytics and data mining for the Verterbi School of Engineering at the University of Southern California.
Jason Platt, MBA, CFP, is a retired professional hockey player who currently serves as Vice President of Wealth Management at Citizens Securities, based in Providence, RI.