Credit Score Using Decison Modeling and notation

DMN - Decision Modeling and Notation Exercise for Credit Score Calculation

1. DMN - Exercise

2. Recreational Fee   A city has created a decision table to determine appropriate usage fees for its recreational facilities based on length of usage and when the usage occurs: The city also has the following behavioral business rule: A senior citizen must not be charged a recreational fee for use of facilities.

3. Credit Score

4. A VantageScore is a type of credit score developed by the three major credit bureaus—Equifax, Experian, and TransUnion—as an alternative to the FICO score. The VantageScore model considers various factors to determine your credit score. Here’s how it’s generally calculated: 1. Payment History (40%) Impact : This is the most important factor. It looks at whether you’ve paid your bills on time. Late payments, delinquencies, and defaults can significantly lower your score. 2. Age and Type of Credit (21%) Impact : This considers the length of your credit history and the mix of credit accounts you have (e.g., mortgages, credit cards, auto loans). A longer history and a diverse mix of credit types can improve your score.

5. 3. Credit Utilization (20%) Impact : This measures the amount of credit you're using relative to your total available credit. A lower credit utilization ratio (typically under 30%) is better for your score. 4. Balances (11%) Impact : This factor looks at the total amount of your outstanding debt, such as the balances on your loans and credit cards. Lower balances relative to your total credit limits are generally better. 5. Recent Credit Behavior and Inquiries (5%) Impact : This includes the number of recent credit inquiries (applications for new credit) and whether you’ve recently opened any new credit accounts. Frequent inquiries and new accounts can lower your score. 6. Available Credit (3%) Impact : This looks at how much credit you have available across all your accounts. Having more available credit can be a positive signal, as long as it isn’t all being used.

6. Steps to Calculate (Approximate Process): Gather Your Credit Data : Collect all your credit reports to see your payment history, account age, credit limits, balances, and recent inquiries. Weight Each Factor : Apply the percentage weight of each factor (as mentioned above) to your credit data. Compute Individual Scores : Calculate the score for each factor based on the data from your credit reports. Sum the Scores : Add up the scores from each factor to get your overall VantageScore .

7. Credit scoring models, like FICO and VantageScore , are proprietary and use complex algorithms that are not publicly disclosed. However, there are open-source or publicly available models and methods that attempt to replicate or approximate the logic of these credit scores.

8. Examples of Open Credit Score Models: OpenCreditScore.org : This is an open-source project aimed at providing transparency in credit scoring. The project offers a basic model for how credit scores might be calculated, but it's more of an educational tool than a precise scoring method. Simple Credit Scoring Models : Some financial institutions or researchers may share simplified versions of credit scoring models. These often involve basic calculations based on credit utilization, payment history, and other factors but are far less sophisticated than FICO or VantageScore .

9. Example of a Simple Credit Scoring Formula: Payment History (35%) : Multiply the percentage of on-time payments by 35. Credit Utilization (30%) : Subtract your credit utilization rate from 1 and multiply by 30. Length of Credit History (15%) : Scale the length of your credit history to a 15-point scale. New Credit (10%) : Subtract the number of recent inquiries from a threshold and multiply by 10. Credit Mix (10%) : Evaluate the diversity of credit types and scale to 10 points.

10. Example Calculation: Let’s say you have: Payment History : 98% on-time payments Credit Utilization : 25% utilization Length of Credit History : 10 years New Credit : 2 inquiries in the last year Credit Mix : A mix of credit types You might calculate your score as: Payment History : 98% * 35 = 34.3 Credit Utilization : (1 - 0.25) * 30 = 22.5 Length of Credit History : (10/20) * 15 = 7.5 (assuming 20 years is the max scoreable history length) New Credit : (5 - 2) * 10 = 30 (assuming 5 inquiries are neutral, fewer is better) Credit Mix : 10 (full score for a diverse mix) Total Score = 34.3 + 22.5 + 7.5 + 30 + 10 = 104.3 (Scaled to fit a 300-850 range)

11. Key Considerations: Accuracy : Open formulas or models provide an estimate but may not be fully accurate. Complexity : Proprietary models like FICO and VantageScore are more complex and incorporate hundreds of variables. Purpose : Open-source models can be useful for educational purposes or gaining a basic understanding of credit scoring principles. If you need an actual credit score, it’s best to obtain it from a credit bureau or financial service that uses the proprietary models.

12. Example of a Simple Credit Scoring Formula: Payment History (35%) : Multiply the percentage of on-time payments by 35. Credit Utilization (30%) : Subtract your credit utilization rate from 1 and multiply by 30. Length of Credit History (15%) : Scale the length of your credit history to a 15-point scale. New Credit (10%) : Subtract the number of recent inquiries from a threshold and multiply by 10. Credit Mix (10%) : Evaluate the diversity of credit types and scale to 10 points.

13. Let's walk through a simplified example of how a credit score might be calculated using a basic model. We'll assign hypothetical weights to each factor, similar to what might be seen in FICO or VantageScore models, and then calculate the score based on some sample data. Example Credit Score Calculation Step 1: Assign Weights to Each Factor We'll use the following weights, which are similar to what might be used in proprietary models: Payment History : 35% Credit Utilization : 30% Length of Credit History : 15% New Credit (Inquiries) : 10% Credit Mix : 10%

14. Step 2: Gather Hypothetical Credit Data Let's assume the following data for a person named Alice: Payment History : 96% on-time payments (over the past 5 years) Credit Utilization : 28% (total credit card balances/total credit limits) Length of Credit History : 8 years New Credit : 2 recent credit inquiries in the last year Credit Mix : Has credit cards, a car loan, and a mortgage

15. Step 3: Calculate Individual Scores for Each Factor Payment History (35%) : Score = 96% * 35 = 33.6 Credit Utilization (30%) : Ideal utilization is typically under 30%. Since Alice is at 28%, she’s in good standing. Score = (1 - 0.28) * 30 = 21.6 Length of Credit History (15%) : If we assume 20 years is the maximum for scoring, Alice’s 8 years might give her: Score = (8 / 20) * 15 = 6 New Credit (10%) : With 2 recent inquiries, assume 5 inquiries are neutral, with fewer being better. Score = (5 - 2) / 5 * 10 = 6 Credit Mix (10%) : Alice has a good mix of credit types. Score = 10 (full score for a diverse mix)

16. Step 4: Add Up the Scores Let's sum the individual scores to get the final credit score: Payment History : 33.6 Credit Utilization : 21.6 Length of Credit History : 6 New Credit : 6 Credit Mix : 10 Total Score = 33.6 + 21.6 + 6 + 6 + 10 = 77.2

17. Step 5: Scale the Score to a Credit Score Range Most credit scores are scaled to fall between 300 and 850. For simplicity, we’ll assume that a score of 100 corresponds to the top of this range: Final Credit Score=(77.2/100)×550+300=724.6 So, Alice’s approximate credit score might be 725 .