Sharpening the accuracy of credit scoring models with machine learning algorithms

The big data revolution and recent advancements in computing power have increased the interest in credit scoring techniques based on artificial intelligence. This has found easy leverage in the fact that the accuracy of credit scoring models has a crucial impact on the profitability of lending institutions. In this chapter, we survey the most popular supervised credit scoring classification methods (and their combinations through ensemble methods) in an attempt to identify a superior classification technique in the light of the applied literature. There are at least three key insights that emerge from surveying the literature. First, as far as individual classifiers are concerned, linear classification methods often display a performance that is at least as good as that of machine learning methods. Second, ensemble methods tend to outperform individual classifiers. However, a dominant ensemble method cannot be easily identified in the empirical literature. Third, despite the possibility that machine learning techniques could fail to outperform linear classification methods when standard accuracy measures are considered, in the end they lead to significant cost savings compared to the financial implications of using different scoring models.