Credit scoring models

Is it possible to tell which credit scoring company issues the highest-quality credit scores? Most companies avoid the issue and subscribe to the most reputable service (a subjective approach at best), or the one with the lowest prices, but either approach may not yield the best results – and results can vary substantially, since the scoring companies input different types of data into their models, as well as assign different weights to the data.

The Credit Score Comparison Test

A good way to quantitatively evaluate scoring systems is to conduct a credit score comparison test, with the objective of identifying the scoring model that most clearly polarizes good and bad credit risks. Incidentally, this level of polarization can be measured with the Kolmogorov-Smirnov (KS) test, which evaluates the ability of a model to separate data (read more about it on Wikipedia, at

To conduct the comparison test, extract a statistically significant proportion of your account file for the past twelve months and compare its results to the credit scores issued by each credit scoring company. Look in particular for situations where the credit scores differ substantially, and where those differences would have resulted in a credit request being rejected that has subsequently resulted in a bad debt write-off. In addition, look for consistent results by a scoring model over a multi-month period.

The Retrospective Validation

If this test results in the decision to change to a new credit scoring company, also be sure to conduct a retrospective validation of the results, using both credit scores again, just to ensure that the original analysis held up over time. In addition, this subsequent analysis will allow the company to test which customers have been accepted under the new credit model that would have been rejected under the old model, and whether those additional credit acceptances turned out to be good credit risks.

By weighing the benefits of reduced bad debt write-offs against any potential change in the cost of the credit scoring service, you can now arrive at a rational evaluation of which credit scoring model works best for your company.

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