Vol 2, No 1 (2014)

Credit scoring process avoiding the excessive risk

Alban Burazeri, Orfea Dhuci, Andromahi Kufo

Abstract

There are many ways that credit risk can be managed. The first line of defense is the use of credit scoring or credit analysis to avoid extending credit to parties that entail excessive credit risk. Credit scoring technologies have sharply reduced the cost of credit evaluation and improved the consistency, speed, and accuracy of credit decisions. Creditors must decide whether to use a customized or generic scoring system or a combination of both. This paper provides a framework for the evaluation of alternatives by comparing generic with customized credit scoring models. Customized credit models are developed for the use of a single creditor. Generic scoring models are sold in the marketplace for use by multiple creditors. Creditors must decide whether to use customized scoring, generic scoring, or a combination of both. The creditor will also have to choose among competing scoring models being those generic or customized. Proper evaluation should consider among other factors, the credit product and type of decisions, the creditor’s capabilities, the environment, the target market, and the characteristics and costs of the models available. The primary purpose of this paper is to provide a framework for these evaluations. We’ll try to compare generic with customized credit scoring models in terms of feasibility, development, implementation, economic, and management issues. Each approach has advantages and disadvantages and, furthermore, the scoring model should be integrated with an overall evaluation system.

Full text:     Download pdf PDF

Keywords

Application processing system, Credit score, Customized credit scoring system, Judgmental credit evaluation, Scorecard.

Publication information

Volume 2, Issue 1
Year of Publication: 2014
ISSN: 1857 - 8721
Publisher: EDNOTERA

How to cite

Burazeri, A., Dhuci, O., Kufo, A. (2014). Credit scoring process avoiding the excessive risk. Journal of Applied Economics and Business, Vol 2, No. 1, 92-104.