Time will tell: behavioural scoring and the dynamics of consumer credit assessment

This paper discusses the use of dynamic modelling in consumercredit risk assessment. It surveys the approaches and objectivesof behavioural scoring, customer scoring and profit scoring.It then investigates how Markov chain stochastic processes canbe used to model the dynamics of the delinquency status andbehavioural scores of consumers. It discusses the use of segmentation,mover–stayer models and the use of second- and third-ordermodels to improve the fit of such models. The alternative survivalanalysis proportional hazards approach to estimating when defaultoccurs is considered. Comparisons are made between the wayscredit risk is modelled in consumer lending and corporate lending.