One of the most frequently asked questions posed to me by clients is: Do I need a custom scorecard? To answer that question, let’s first start with the benefits of a custom scorecard (or model). Here are a few of the best things about a custom scorecard:
1) Increased model performance. Typically a custom scorecard (or model) will generate a lift in KS (Kolmogorov-Smirnov statistic) from anywhere between 5% and 10%. And will vary between portfolios and industry.
2) Maximum flexibility in score range. A custom scorecard can be tailored to accommodate whatever score range you want. Do you want a score from 1 to 5, 1 to 10, or even 500 to 1000? A customized approach will accomplish this.
3) Manage and customize the minimum scoring criteria. What is the minimum amount of data necessary to generate a score? Does your credit policy call for strict criteria, or is a less conservative approach acceptable? These issues can be addressed specifically to your organization.
4) Custom scorecards can incorporate internal data specific to your organization. For example, application data can be used like financial statement data and loan specific data such as loan-to-value ratio’s and debt ratios. This type of internal data typically makes the model perform better.
5) Implementation can take place almost anywhere. Depending on what platform or system is being used, installation into your organization can be done with various degrees of ease.
So if these features of custom scorecards are interesting to you and your organization, then perhaps a custom scorecard is right for you!