Portfolio Trends Examination

Obviously you have to understand the portfolio you are developing the score on. Is it credit cards, short term loan or mortgage? Is it an application score or a behavioral score? And more importantly, how will your portfolio behave in the next couple of periods?

loss trends

Take above graph as an example: Knowing that your losses maximize at 12 months after the snapshot and stabilize at 24 months level, you can develop a bad definition that will be able to predict the lifetime loss of the customer.

While your ultimate goal is to predict whether the customer will go default or not, on average this may take place in a distant future (e.g. in 2 years). In such case, you need to come up with a bad definition that will tell you in advance that the customer really will go default in the end of 24 months. This is why portfolio trends evaluation is a crucial step. It will also help during the development of score strategy.

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