Steps in PD Credit Scorecard Model Development

Steps in PD Credit Scorecard Model Development


Step 1: Understanding the business problem

Step 2: Defining the dependent variable and understanding the relevant independent variables

Step 3: Pulling the data (dependent and independent variables) from databases

Step 4: Data cleaning and segmentation

Step 5: Sampling and model methodology selection

Step 6: Data preparation

                 A) Determining exclusion criterion for observation periods

                 B) Determining exclusion criterion for performance periods

                 C) Outlier treatment

                 D) Missing value analysis

                 E) Univariate data analysis

                 F) Bi-variate data analysis

                G) Binning and Transformation of variables

Step 7: Model building

               A) Variable selection or reduction

               B) Multicollinearity check

               C) Parameter estimation

               D) Score generation

Step 8: Model validation

              A) Assessing model discrimination/separation power

              B) Assessing model calibration power or goodness-of-fit

Step 9: Model implementation

Step 10: Periodical model monitoring and model recalibration (if required)