OCC Credit Scoring Study

The OCC has released a study on credit scoring. While the conclusions of the study are not new, the study does raise ideas for improving the effectiveness of credit scoring. Credit scoring systems are based on customer data. The analysis uses the performance records of customers who have obtained credit. This database does not include information on customers who were denied. Instead, the analysis has to create assumptions about customers who were denied. To the extent that these instructions are not accurate, the system is weakened.

Some high volume creditors have experimented with techniques to fill this information void. For a brief period, the creditor approves all applicants, assigning cautiously low credit limits to applicants that would have been denied. The performance of these experimentally approved applicants provides valuable information that can be used to strengthen the credit scoring system.

Copyright © 2005 Compliance Action. Originally appeared in Compliance Action, Vol. 9, No. 16, 1/05