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So how many ____ does it take to ____?

August 02, 2011 by Dan Meder

Ah, thought I was heading towards a bad joke? Well, while it may be tempting to follow that through, I was really talking about trade payments needed to make a credit decision. When I started in the data business all those years ago, my primary responsibility was to review credit reports all day. I was taught to circle all the delinquent experiences, those beyond 30 days anyway, and then look at all the circled experiences to decide what type of rating to put on the business.

Usually after the first 20 or so (often less), you got a pretty good feel for how a particular business was going to pay. You could have put 50 or 500 more experiences on that report, and my opinion, it wouldn’t have changed. Given the amount of times I had to do that every day, I got very good at spotting trouble from just a handful of payment experiences.

A little while later I graduated to the world of credit scoring. At that point, I began to realize that just focusing on how many trades were in the report wasn’t even the crucial issue. The real value of credit scoring is the model development process that looks at hundreds of data elements, and observes thousands and thousands of businesses, to arrive at the most efficient set of data. That is more powerful than just looking at the payment record, or worrying about how many payments there are in a credit report.

So, a suggestion? Rather than thinking about the depth of trade you see on a credit report, think instead about what the score is telling you about the likelihood the business will pay severely slowly. I believe you will end up in a better place.

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