Time varying or static cut-offs for credit scorecards

Abstract

This note points out that the ability of credit scorecards to separate Goods from Bads changes over time. A simple way of dealing with such changes is to adjust the cut-off scores being used. These adjustments can be made by using the score to log odds relationship which is regularly monitored. In a case study there are decreases in the costs—in some case considerable decreases—of using the scorecard by making such adjustments compared with making no adjustments.

Keywords:

• credit scoring
• dynamic cut-off adjustments
• log odds score relationships

Acknowledgements

This work was supported by the Korean Research Foundation Grant (KRF-2009-013-C00011). We are grateful to a referee for the suggested approximation to the variance in the cost formula.