Human Judgment Seen Superior to Credit Scoring

American Banker, March 16, 1998 | Go to article overview

Human Judgment Seen Superior to Credit Scoring


The bout with bankruptcies and delinquencies has at least one executive of the consumer credit industry questioning its dependence on the science of credit scoring.

Jeffrey L. Dodge, senior vice president and general manager-banking at Equifax Inc., said lenders may have gotten so caught up in the science that they lose sight of "the art of risk management." He said it could only be a plus if financial institutions reemphasize "nonquantitative elements of human intervention and judgment." He expressed optimism that these are "starting to come back again."

"I am not saying scientific models should be less important," Mr. Dodge said at a recent conference sponsored by HNC Software Inc., a vendor of some of the science he was talking about. "The models are of increasing importance, but the nonscientific should be even more."

As a provider of consumer and market information to financial institutions, Mr. Dodge's company is deep into the technology of data bases and analytics. The same is true of Atlanta-based Equifax's credit bureau competitors, Experian and Trans Union; of the credit scoring community led by Fair, Isaac & Co.; and, increasingly, of the corporations they provide services to.

At one time, Mr. Dodge pointed out, "a lot of information wasn't accessible. Risk management was all art-subjective and human judgment."

The ensuing explosion of information, the need for lenders in competitive markets to act and react quickly with new credit cards and other offers, bankers' aversion to risk, and the proliferation of systematic evaluation tools caused the art to get "overwhelmed" by scientific approaches, Mr. Dodge said.

"Forty years ago, the first rules-based systems were a catalyst for explosive growth in consumer credit," he said. But over time, the mathematical models that predicted market results, and the information they needed to function well, became more and more complicated. Existing products may not be well suited for the "new paradigm" of a strong economy with bankruptcies at record levels.

Hence the demand for bankruptcy predictors like one that Equifax and HNC teamed up to produce.

The state of conventional credit scoring, wherein a given numerical value determines an applicant's creditworthiness, also troubles Robert Hammer, a specialist in credit card portfolio sales.

Speaking to the same HNC financial services conference in San Diego, the chief executive officer of R. …

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