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A fuzzy decision support system for credit scoring

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Abstract

Credit score is a creditworthiness index, which enables the lender (bank and credit card companies) to evaluate its own risk exposure toward a particular potential customer. There are several credit scoring methods available in the literature, but one that is widely used is the FICO method. This method provides a score ranging from 300 to 850 as a fast filter for high-volume complex credit decisions. However, it falls short in the aspect of a decision support system where revised scoring can be achieved to reflect the borrower’s strength and weakness in each scoring dimension, as well as the possible trade-offs made to maintain one’s lending risk. Hence, this study discusses and develops a decision support tool for credit score model based on multi-criteria decision-making principles. In the proposed methodology, criteria weights are generated by fuzzy AHP. Fuzzy linguistic theory is applied in AHP to describe the uncertainties and vagueness arising from human subjectivity in decision making. Finally, drawing from the risk distance function, TOPSIS is used to rank the alternatives based on the least risk exposure. A sensitivity analysis is also demonstrated by the proposed fuzzy AHP-TOPSIS method.

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Notes

  1. http://www.myfico.com/crediteducation/whatsinyourscore.aspx.

  2. See http://www.fico.com/en/about-us/history/ for the history of FICO.

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Authors and Affiliations

  1. School of Mathematical Sciences, Universiti Sains Malaysia, 11800, Minden, Penang, Malaysia

    Joshua Ignatius & Amirah Rahman

  2. Department of Strategic Management and Marketing, Leicester Business School, De Montfort University, Hugh Aston Building, The Gateway, Leicester, LE1 9BH, UK

    Adel Hatami-Marbini

  3. School of Mathematical Sciences, and School of Mathematical Sciences, Universiti Sains Malaysia, 11800, Minden, Penang, Malaysia

    Lalitha Dhamotharan

  4. Faculty of Economics and Business, KU Leuven, Warmoesberg 26, 1000, Brussels, Belgium

    Pegah Khoshnevis

Authors
  1. Joshua Ignatius
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  2. Adel Hatami-Marbini
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  3. Amirah Rahman
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  4. Lalitha Dhamotharan
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  5. Pegah Khoshnevis
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Correspondence to Adel Hatami-Marbini.

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Ignatius, J., Hatami-Marbini, A., Rahman, A. et al. A fuzzy decision support system for credit scoring. Neural Comput & Applic 29, 921–937 (2018). https://doi.org/10.1007/s00521-016-2592-1

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