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Default avoidance on credit card portfolios using accounting, demographical and exploratory factors: decision making based on machine learning (ML) techniques

Author

Listed:
  • Nikolaos Sariannidis

    (Western Macedonia University οf Applied Sciences)

  • Stelios Papadakis

    (Technological Educational Institute of Crete)

  • Alexandros Garefalakis

    (Technological Educational Institute of Crete)

  • Christos Lemonakis

    (Technological Educational Institute of Crete)

  • Tsioptsia Kyriaki-Argyro

    (Western Macedonia University οf Applied Sciences)

Abstract

Effective and thorough credit-risk management is a key factor for lending institutions, as significant financial losses can arise from the borrowers’ default. Consequently, machine learning methods can measure and analyze credit risk objectively when at the same time they face increasingly attention. This study analyzes default payment data from a credit cards’ portfolio containing some 30,000 clients from Taiwan with twenty-three attributes and with no missing information. We compare prediction accuracy of seven classification methods used, i.e. KNN, Logistic Regression, Naïve Bayes, Decision Trees, Random Forest, SVC, and Linear SVC. The results indicate that only few out of most of the typical variables used can adequately analyze default characteristics in terms of lending decisions. The results provide effective feedback to credit evaluators, lending institutions and business analysts for in-depth analysis. Also, they mention to the importance of the precautionary borrowing techniques to be used to better understand credit-card borrowers’ behavior, along with specific accounting, historical and demographical characteristics.

Suggested Citation

  • Nikolaos Sariannidis & Stelios Papadakis & Alexandros Garefalakis & Christos Lemonakis & Tsioptsia Kyriaki-Argyro, 2020. "Default avoidance on credit card portfolios using accounting, demographical and exploratory factors: decision making based on machine learning (ML) techniques," Annals of Operations Research, Springer, vol. 294(1), pages 715-739, November.
    • Handle: RePEc:spr:annopr:v:294:y:2020:i:1:d:10.1007_s10479-019-03188-0
    DOI: 10.1007/s10479-019-03188-0
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    References listed on IDEAS

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    1. Shigeyuki Hamori & Minami Kawai & Takahiro Kume & Yuji Murakami & Chikara Watanabe, 2018. "Ensemble Learning or Deep Learning? Application to Default Risk Analysis," JRFM, MDPI, vol. 11(1), pages 1-14, March.
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    5. Yong Shi & Yi Peng & Gang Kou & Zhengxin Chen, 2005. "Classifying Credit Card Accounts For Business Intelligence And Decision Making: A Multiple-Criteria Quadratic Programming Approach," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 4(04), pages 581-599.
    6. Jing He & Xiantao Liu & Yong Shi & Weixuan Xu & Nian Yan, 2004. "Classifications Of Credit Cardholder Behavior By Using Fuzzy Linear Programming," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 3(04), pages 633-650.
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    Cited by:

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    2. Dawen Yan & Xiaohui Zhang & Mingzheng Wang, 2021. "A robust bank asset allocation model integrating credit-rating migration risk and capital adequacy ratio regulations," Annals of Operations Research, Springer, vol. 299(1), pages 659-710, April.

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