The relevance of credit risk analysis

With the objective of providing a broader context and understanding of the relevance of addressing classification problems in the finance sector, for this part of the book, it is important to define some core concepts, even from a high-level perspective. The term “credit risk” in the context of this chapter is the chance that a lender will lose money if a borrower doesn’t pay back a loan by a certain date. As the credit card business has grown quickly, as illustrated in Figure 6.1, and the financial players have grown over the years, the challenge of expanding the scope of targeted people requires more sophisticated underwriting systems. This puts a big portion of financial institutions at risk if the means to assess this risk are not accurate enough.

Given the situation previously described, it is often necessary to look at the credit risk of customers who have little or no credit history to expand the current client segments...