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The Evolution Of The Credit Risk Scorecard

Jan 13, 2008
Everywhere you go, there just might be an agent promoting the features and benefits you would enjoy when you get this credit card or that credit card. Yes, credit card companies today are really doing their best in keeping their clients by providing services that have been enhanced, as well as products that just take your breath away. Unfortunately, in the struggle of keeping these clients from cutting their credit card accounts and such, the companies sometimes offer these products and services for all the wrong reasons.

This is not meant to judge anyone, but there is indeed a need to select the right people to whom credit card companies should offer these products and services. Professionals known as Risk Managers are then employed to calculate the risks entailed in offering these to existing clients. And for this, the development of a credit risk scorecard is then very much needed.

If you manage a credit card company, and you are in the position to offer enhanced services and products to existing clients, who would you offer these to? You would most certainly go for the client who pays his debts religiously, right? Clients who are problematic when it comes to paying their dues are then the ones that you would avoid. If you manage just a small credit card company, well, determining who these clients are would not be that hard. However, if you manage an international credit card company, then determining the identities of these clients can become very daunting indeed! Thus, risk managers have to develop credit risk scorecards not just to identify these favored clients, but also to deal with the problematic clients so that no more losses would be incurred as much as possible.

The concept of credit risk scorecards is not entirely new at all. In fact, a lot of industries have been using such scorecards already. Insurance companies, for starters, have been using risk scorecards for quite some time now. No matter what industry, what's important here is the methodology employed when scoring, as well as the method of analysis used when assessing risks involved.

In the earlier years, financial institutions did not really make their own credit risk scorecards. These financial institutions actually affiliated themselves with credit risk vendors when developing these scorecards. What happens here is that the banks and credit card companies provide the vendors all the information that they need in the development of the scorecards. With this information, the vendors then devise their own scorecard according to the specifications made by the financial institutions, of course.

Today, however, most financial institutions have resorted to developing their own credit risk scorecards. This is actually attributed for various reasons. Basically, the application software that is needed in developing credit risk scorecards has been made available to the companies already. This way, companies would no longer have to include this in their budget. With this software made available, not only will time be saved, but the developed credit risk scorecard would actually be more aligned according to the needs of the company itself. And this is indeed one of the major advantages of such a change.
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