Question

Nast Stores has derived the following consumer credit-scoring model after years of data collecting and model testing:Accounts Receivable Management | 153 Y = (0.20 × EMPLOYMT) + (0.4 × HOMEOWNER) + (0.3 × CARDS) EMPLOYMT = 1 if employed full-time, 0.5 if employed part-time, and 0 if unemployed HOMEOWNER = 1 if homeowner, 0 otherwise CARDS = 1 if presently has 1–5 credit cards, 0 otherwise Nast determines that a score of at least 0.70 indicates a very good credit risk, and it extends credit to these individuals.

a. I f Janice is employed part-time, is a homeowner, and has six credit cards at present, does the model indicate she should receive credit?

b. J anice just got a full-time job and closed two of her credit card accounts. Should she receive credit? Has her creditworthiness increased or decreased, according to the model?

c. Y our boss mentions that he just returned from a trade-association conference, at which one of the speakers recommended that length of time at present residence (regardless of homeownership status) be included in credit-scoring models. If the weight turns out to be 0.25, how do you think the variable would be coded (i.e., 0 stands for what, 1 stands for what, etc.)?

d. S uggest other variables that Associated might have left out of the model, and tell how you would code them (i.e., 0, 1, 2 are assigned to what conditions or variables?).

Answer 1

Janice is employed part-time: Score for this variable: 0.5

Janice is a home-owner: Score for this variable: 1

Janice has six credit cards: Score for this variable: 0

Inserting the value in the variable:

Particulars	Multiple	Score	Score
Employment	0.2	0.5	0.1
Homeowner	0.4	1	0.4
No of Credit Cards	0.3	0	0
Total			0.5

A score of 0.5 is a good score but not near to 0.7. She should not receive credit as she has a history of having six cards and does not have a full employment.

2) If Janice has got full time job the employment score goes up to 1

And closing two of the credit cards would bring the no of cards down to 4, and would increase the score to 1. The score now changes to:

Particulars	Multiple	Score	Score
Employment	0.2	1	0.2
Homeowner	0.4	1	0.4
No of Credit Cards	0.3	1	0.3
Total			0.9

   This is an excellent score, of 0.9 which is well over the prescribed score of 0.7, now she is eligible for the new card.

c) There needs to be changed in the scorecard matrix, this is what i propose:

Particulars	Multiple	Particulars	Multiple
Employment	0.2	Employment	0.2
Homeowner	0.25	Homeowner	0.4
Period of Stay	0.25	No of Credit Cards	0.3
No of Credit Cards	0.3	Total

I would like to keep employment and no of credit cards score as the same, I would like to reduce the homeowner score a bit as it may be possible that the applicant must have taken a new home on loan so that would be an additional burden to the applicant. But if the period of stay is high i.e. for a longer no of years he can be rated higher so I would keep 0.25 for period of stay. The score of 0 would be given for a shorter period of stay and 1 for longer period of stay.

d) There are few variables which could have been added, like the balance of the credit account where if the loan/credit account is utilized fully he should be given a score of 0, if the outstanding amount is less than 50% of the total limit then 1. Because if the applicant has used the entire limit then adding new credit would be added pressure to his already payments.

Payment history: If the payment of the loan are properly made it should be graded as 1, if there is delay and or no payment then 0.

Duration of Credit: If the average age of the credit is old, then it should be marked as 1, if the average age of the credit is new then it should be marked as 0.