Analysis of clustering algorithms for credit risk evaluation using multiple correspondence analysis

This research concentrates on segmenting credit card clients of Taiwan into optimal groups. Unsupervised Learning plays a significant role in dividing customers into similar groups based on several parameters. If customers are clustered in groups optimally, it leads towards the retrieval of better precision from machine learning models applied to customers associated with the clusters. Different machine learning algorithms (Linear discriminant analysis, logistic regression and random forest) were applied on the obtained clusters through K-means, hierarchical and HK Means clustering algorithm, and predictive accuracy is compared with the accuracy obtained via applying mentioned machine learning models on the whole dataset. In this paper, a novel approach of combining K Means and hierarchical clustering (HK Means) is used. In this approach, HK means clustering algorithms are applied on the factorial coordinates, obtained from multiple correspondence analyses for segmenting customers into optimal groups has been proposed. The accuracy of the clustering techniques is evaluated from the decomposition of inertia. The results demonstrate that the combination of K Means and hierarchical clustering proved to be optimal clustering techniques for customer segmentation which can be used further for applying Machine Learning techniques for credit risk analysis.