Discover The Good, The Bad And The Ugly Of Two-Dimensional Score Matrices
Two-dimensional score matrices are used in marketing, origination, or account management to make decisions, with other variables or policy rules. Let’s examine the pros and cons of this approach.
Two-dimensional score matrices have been around for a long time. Typically, credit bureau scores and an internal (often custom) score are used. These two-dimensional score matrices are used in marketing, origination, or account management to make decisions, with other variables or policy rules.
Combining two scores into a risk tier is straight forward:
- Determine score breaks for each score.
- Cross two scores into a matrix, using breaks chosen in step one.
- Measure performance outcomes you care about (ex: bad rate).
- Group the cells of the matrix into risk tiers based on similar bad rates.
Sound’s simple, right? See a demo of the FICO decisioning platform for how to solve these kinds of decisioning challenges. Now, let’s examine the pros and cons of this approach:
Simplification is good.
- Provides a single measure for risk. Everyone understands “risk tier 1” vs. “risk tier 5”.
- Feeds into other measurements. Some institutions start with bad rates and through an analytic process, determine forecasted customer values, risk and other measures (responsiveness, take-up, revolving behavior, etc.)
What could go wrong?
- The scores are binned into ranges. This gives less granularity when making decisions, removing some predictiveness of the scores.
- Over time, risk tiers may become inaccurate. As scores degrade and the make-up of your portfolio changes, bad rates associated with the tiers may change. You’ll need to re-validate risk tiers.
- If risk tiers are for adverse action, reasons might not be obvious, since it’s more difficult to determine which score led to the action.
What is the downside?
- Risk tiers are dependent on scores, redeveloped over time. An embedded score means you need to redevelop your risk tiers every time you rebuild scores. For a new external score (upgraded FICO® Score), you’ll need to re-calculate, gain approval and maintain risk tiers.
- The ranges may not be optimal for every segment of your portfolio. Specific segments might benefit from different ranges or may not have the same distribution within them; thus, the bad rates may differ.
Is there a way to develop and analyze tiers, but ensure the right way to measure risk when developing a strategy? In this blog, you can see how to develop and use risk tiers. For new blog posts, follow the FICO Community blogs.