Classification methods applied to credit scoring: A systematic review and overall comparison

TL;DR

This paper systematically reviews various classification methods used in credit scoring, highlighting their evolution, application, and significance in managing credit risk effectively.

Contribution

It provides a comprehensive overview of binary classification techniques in credit scoring, emphasizing their theoretical foundations and practical applications over time.

Findings

Main classification techniques are crucial for credit rating.

Significant paradigm shifts have occurred in credit scoring methods.

The review highlights the importance of evolving models for better risk management.

Abstract

The need for controlling and effectively managing credit risk has led financial institutions to excel in improving techniques designed for this purpose, resulting in the development of various quantitative models by financial institutions and consulting companies. Hence, the growing number of academic studies about credit scoring shows a variety of classification methods applied to discriminate good and bad borrowers. This paper, therefore, aims to present a systematic literature review relating theory and application of binary classification techniques for credit scoring financial analysis. The general results show the use and importance of the main techniques for credit rating, as well as some of the scientific paradigm changes throughout the years.