Credit Card Credit Scoring Model And Optimal Critical Strategy

In recent years, the credit card business in China’s banks has been growing rapidly, according to the message from People’s Bank of China, as of the end of the second quarter of2012, the credit card volume in domestic market has exceeded300million threshold, reaching302million. When commercial banks are chasing credit card market share and high profits, they’re also facing high potential risk of high bad debts ratio. The development and application of credit scoring model technology, helps commercial banks to assess the repayment capability of repayment willingness objectively, comprehensively and accurately, which supports banks to avoid and reduce bad debt losses and provide a very effective approach for decision making.Credit score of each applicant is calculated from credit scoring model, which tells the banks degree of potential risk from this application, the bank decide and develop the strategies to acquire customers according to its management goals and risk tolerance level. Typically, the bank will set up a minimum score, we always call it threshold (cutoff score), the applications with credit score higher than cutoff score will be accepted, while, the applications with the credit score lower than cutoff score will be rejected. So how to set up an optimal threshold, and to control the relationship among bank profits, bad debt ratio as well as approval ratio has become more and more important during the period of credit risk management lifecycle.In academia, there are a lot of theoretical studies focusing on the development of credit scoring model, while the studies of how to set up the appropriate cut-off scores and develop optimal acquisition strategy are not much. The major reason of lack of attention is the academic researchers biased in favor of continued deeper exploration on a number of aspects of the credit scoring techniques as well as statistical methods, because they believe this can continue to improve the distinguish ability of the credit scoring model. However, on operation practice such as banks, how to effectively use credit scoring tools to develop optimal cutoff strategy is also very important.The focus of how to set up optimal cutoff strategy of credit scoring model in both country and abroad is mainly on the analysis of profit and loss goal, collections cost or market share, while ignoring the problems of capital constraints and capital allocation from Basel requirement. The paper through empirical analysis of several different methods of setting the cut-off strategy presented that under the framework of the New Basel Capital Accord, the main purpose of the credit business risk management is to establish the bank’s optimal capital structure and determine best risk-adjusted return on capital. When banks is going to set up cut-off strategy to expand its customers, they not only need to consider the risk cost, profit and market share, but also need to take into account the risk-adjusted return on capital as the main measure to make the final decision.