Enhancing Accuracy Of Credit Scoring Classification With Imbalance Data Using Synthetic Minority Oversampling Technique-Support Vector Machine (SMOTE-SVM) Model

Credit is one of the business models that provide a significant growth. With the growth of new credit applicants and financial markets, the possibility of credit problem occurrence also become higher. Thus, it becomes important for a financial institution to conduct a preliminary selection to the credit applicants. In order to do that, credit scoring becomes one of the models used by a financial institution to perform a preliminary selection of potential customer. One of the most common techniques used to develop a credit scoring model is data mining classification task. However, this technique provides difficulties in classifying imbalanced data distribution. It is because imbalanced data problem may lead the classifier to perform misclassification by classified all of the data into majority class and perform poorly on minority class. In the case of credit scoring, credit data also have imbalanced data distribution. Therefore, classifying a credit data with imbalanced data distribution using unappropriated technique may lead the classification provides a wrong decision result for a financial institution. In this study, several methods for handle imbalanced data problem are identified. Moreover, an improvement of credit scoring model with imbalanced data problem in a financial institution using SMOTE-SVM model is also proposed in this study. This study is conducted in five phases which are data collection, data pre-processing, feature selection, classification, validation, and evaluation. For the experiments using SMOTE-SVM model, the experiments are conducted by taking a consideration in different data ratio and nearest neighbours used in SMOTE. The result of experiments provides that the accuracy and performance result are improved along with the balanced data using SMOTE-SVM model. The performance measurement using 10-fold cross validation and confusion matrix shows that SMOTE-SVM model can correctly classify most of the data in each class with the good result of accuracy, class precision, and class recall. Based on this result, an SMOTE-SVM model is believed to be effective in handling imbalanced data for credit scoring classification

Credit Scoring Based on Hybrid Data Mining Classification

The credit scoring has been regarded as a critical topic. This study proposed four approaches combining with the NN (Neural Network) classifier for features selection that retains sufficient information for classification purpose. Two UCI data sets and different approaches combined with NN classifier were constructed by selecting features. NN classifier combines with conventional statistical LDA, Decision tree, Rough set and F-score approaches as features preprocessing step to optimize feature space by removing both irrelevant and redundant features. The procedure of the proposed algorithm is described first and then evaluated by their performances. The results are compared in combination with NN classifier and nonparametric Wilcoxon signed rank test will be held to show if there has any significant difference between these approaches. Our results suggest that hybrid credit scoring models are robust and effective in finding optimal subsets and the compound procedure is a promising method to the fields of data mining

Data mining in computational finance

Computational finance is a relatively new discipline whose birth can be traced back to early 1950s. Its major objective is to develop and study practical models focusing on techniques that apply directly to financial analyses. The large number of decisions and computationally intensive problems involved in this discipline make data mining and machine learning models an integral part to improve, automate, and expand the current processes. One of the objectives of this research is to present a state-of-the-art of the data mining and machine learning techniques applied in the core areas of computational finance. Next, detailed analysis of public and private finance datasets is performed in an attempt to find interesting facts from data and draw conclusions regarding the usefulness of features within the datasets. Credit risk evaluation is one of the crucial modern concerns in this field. Credit scoring is essentially a classification problem where models are built using the information about past applicants to categorise new applicants as ‘creditworthy’ or ‘non-creditworthy’. We appraise the performance of a few classical machine learning algorithms for the problem of credit scoring. Typically, credit scoring databases are large and characterised by redundant and irrelevant features, making the classification task more computationally-demanding. Feature selection is the process of selecting an optimal subset of relevant features. We propose an improved information-gain directed wrapper feature selection method using genetic algorithms and successfully evaluate its effectiveness against baseline and generic wrapper methods using three benchmark datasets. One of the tasks of financial analysts is to estimate a company’s worth. In the last piece of work, this study predicts the growth rate for earnings of companies using three machine learning techniques. We employed the technique of lagged features, which allowed varying amounts of recent history to be brought into the prediction task, and transformed the time series forecasting problem into a supervised learning problem. This work was applied on a private time series dataset

Support Vector Machines for Credit Scoring and discovery of significant features

The assessment of risk of default on credit is important for financial institutions. Logistic regression and discriminant analysis are techniques traditionally used in credit scoring for determining likelihood to default based on consumer application and credit reference agency data. We test support vector machines against these traditional methods on a large credit card database. We find that they are competitive and can be used as the basis of a feature selection method to discover those features that are most significant in determining risk of default. 1

Towards a Comprehensible and Accurate Credit Management Model: Application of four Computational Intelligence Methodologies

The paper presents methods for classification of applicants into different categories of credit risk using four different computational intelligence techniques. The selected methodologies involved in the rule-based categorization task are (1) feedforward neural networks trained with second order methods (2) inductive machine learning, (3) hierarchical decision trees produced by grammar-guided genetic programming and (4) fuzzy rule based systems produced by grammar-guided genetic programming. The data used are both numerical and linguistic in nature and they represent a real-world problem, that of deciding whether a loan should be granted or not, in respect to financial details of customers applying for that loan, to a specific private EU bank. We examine the proposed classification models with a sample of enterprises that applied for a loan, each of which is described by financial decision variables (ratios), and classified to one of the four predetermined classes. Attention is given to the comprehensibility and the ease of use for the acquired decision models. Results show that the application of the proposed methods can make the classification task easier and - in some cases - may minimize significantly the amount of required credit data. We consider that these methodologies may also give the chance for the extraction of a comprehensible credit management model or even the incorporation of a related decision support system in bankin

An Overview of the Use of Neural Networks for Data Mining Tasks

In the recent years the area of data mining has experienced a considerable demand for technologies that extract knowledge from large and complex data sources. There is a substantial commercial interest as well as research investigations in the area that aim to develop new and improved approaches for extracting information, relationships, and patterns from datasets. Artificial Neural Networks (NN) are popular biologically inspired intelligent methodologies, whose classification, prediction and pattern recognition capabilities have been utilised successfully in many areas, including science, engineering, medicine, business, banking, telecommunication, and many other fields. This paper highlights from a data mining perspective the implementation of NN, using supervised and unsupervised learning, for pattern recognition, classification, prediction and cluster analysis, and focuses the discussion on their usage in bioinformatics and financial data analysis tasks