The Basis of Credit Scoring: On the Definition of Credit Default Events

The concrete circumstances which lead to the definition of a certain credit as default or non-default are usually not discussed in the literature. Since we have access to a large data set of complete payment histories of relatively short-termed installment credits, we can investigate a possible solution to the problem of defining and detecting defaulted credits. We propose a definition of credit default events where we adopt the patterns of payment, a common measure for the control of accounts receivable, to the case of installment credits. In addition, we define indicators of individual payment performance which can be used for monitoring payment behavior on-line, once a credit scoring system has been implemented in practice. Consequently, the update of a scoring model need not depend on the information of closed credits, which becomes only available at the end of the payment term at the earliest.