Case: German Credit

The German Credit data set (available at ftp.ics.uci.edu/pub/machine-learning-databases/statlog/) contains

observations on 30 variables for 1000 past applicants for credit. Each applicant was rated as good credit
(700 cases) or bad credit (300 cases).

New applicants for credit can also be evaluated on these 30 "predictor" variables. We want to develop a
credit scoring rule that can be used to determine if a new applicant is a good credit risk or a bad credit risk,
based on values for one or more of the predictor variables. All the variables are explained in Table 1.1.
(Note: The original data set had a number of categorical variables, some of which have been transformed
into a series of binary variables so that they can be appropriately handled by XLMiner. Several ordered
categorical variables have been left as is; to be treated by XLMiner as numerical. The data has been
organized in the spreadsheet German CreditI.xls)
Var. # Variable Name Description Variable Type Code Description

1. OBS# Observation No. Categorical Sequence Number in data set

2. CHK_ACCT Checking account status Categorical 0 : < 0 DM

1: 0 <= ...< 200 DM

2 : => 200 DM
3: no checking account
3. DURATION Duration of credit in months Numerical
4. HISTORY Credit history Categorical 0: no credits taken
1: all credits at this bank paid back duly
2: existing credits paid back duly till now
3: delay in paying off in the past
4: critical account
5. NEW_CAR Purpose of credit Binary car (new) 0: No, 1: Yes
6. USED_CAR Purpose of credit Binary car (used) 0: No, 1: Yes
7. FURNITURE Purpose of credit Binary furniture/equipment 0: No, 1: Yes
8. RADIO/TV Purpose of credit Binary radio/television 0: No, 1: Yes
9. EDUCATION Purpose of credit Binary education 0: No, 1: Yes
10. RETRAINING Purpose of credit Binary retraining 0: No, 1: Yes
11. AMOUNT Credit amount Numerical
12. SAV_ACCT Average balance in savings account Categorical 0 : < 100 DM
1 : 100<= ... < 500 DM
2 : 500<= ... < 1000 DM
3 : =>1000 DM
4 : unknown/ no savings account
13. EMPLOYMENT Present employment since Categorical 0 : unemployed
1: < 1 year
2 : 1 <= ... < 4 years
3 : 4 <=... < 7 years
 4 : >= 7 years
14. INSTALL_RATE Installment rate as % of disposable income Numerical
15. MALE_DIV Applicant is male and divorced Binary 0: No, 1:Yes
16. MALE_SINGLE Applicant is male and single Binary 0: No, 1:Yes
17. MALE_MAR_WID Applicant is male and married or a Binary 0: No, 1:Yes
widower
18. CO-APPLICANT Application has a co-applicant Binary 0: No, 1:Yes
19. GUARANTOR Applicant has a guarantor Binary 0: No, 1:Yes
20. PRESENT_RESIDENT Present resident since - years Categorical 0: <= 1 year

1<<=2 years
2<<=3 years
3:>4years
21. REAL_ESTATE Applicant owns real estate Binary 0: No, 1:Yes
22. PROP_UNKN_NONE Applicant owns no property (or unknown) Binary 0: No, 1:Yes

23. AGE Age in years Numerical

24. OTHER_INSTALL Applicant has other installment plan credit Binary 0: No, 1:Yes
25. RENT Applicant rents Binary 0: No, 1:Yes
26. OWN_RES Applicant owns residence Binary 0: No, 1:Yes
27. NUM_CREDITS Number of existing credits at this bank Numerical
28. JOB Nature of job Categorical 0 : unemployed/ unskilled - non-resident

1 : unskilled - resident
2 : skilled employee / official
3 : management/ self-employed/highly
qualified employee/ officer
29. NUM_DEPENDENTS Number of people for whom liable to Numerical
provide maintenance
30. TELEPHONE Applicant has phone in his or her name Binary 0: No, 1:Yes
31. FOREIGN Foreign worker Binary 0: No, 1:Yes
32 RESPONSE Credit rating is good Binary 0: No, 1:Yes

Table 1.1 Variables for the German Credit data.

Table 1.2, below, shows the values of these variables for the first several records in the case.
OBS#

INSTALL_RATE
EMPLOYMENT

MALE_SINGLE
RETRAINING
EDUCATION
FURNITURE
USED_CAR
CHK_ACCT

DURATION

SAV_ACCT
NEW_CAR

MALE_DIV
RADIO/TV
HISTORY

AMOUNT
1 0 6 4 0 0 0 1 0 0 1169 4 4 4 0 1
2 1 48 2 0 0 0 1 0 0 5951 0 2 2 0 0
3 3 12 4 0 0 0 0 1 0 2096 0 3 2 0 1
4 0 42 2 0 0 1 0 0 0 7882 0 3 2 0 1
PRESENT_RESIDENT

PROP_UNKN_NONE

NUM_DEPENDENTS
MALE_MAR_or_WID

OTHER_INSTALL
CO-APPLICANT

NUM_CREDITS
REAL_ESTATE
GUARANTOR

TELEPHONE

RESPONSE
OWN_RES

FOREIGN
RENT
AGE

JOB

0 0 0 4 1 0 67 0 0 1 2 2 1 1 0 1
0 0 0 2 1 0 22 0 0 1 1 2 1 0 0 0
0 0 0 3 1 0 49 0 0 1 1 1 2 0 0 1
0 0 1 4 0 0 45 0 0 0 1 2 2 0 0 1
Table 1.2 The data (first several rows)

The consequences of misclassification have been assessed as follows: the costs of a false positive
(incorrectly saying an applicant is a good credit risk) outweigh the cost of a false negative (incorrectly
saying an applicant is a bad credit risk) by a factor of five. This can be summarized in the following table.

Predicted (Decision)

Good (Accept) Bad (Reject)

Actual Good 0 100 DM

Bad 500 DM 0

Table 1.3 Opportunity Cost Table (in deutch Marks)

The opportunity cost table was derived from the average net profit per loan as shown below:

Predicted (Decision)

Good (Accept) Bad (Reject)

Actual Good 100 DM 0

Bad - 500 DM 0

Table 1.4 Average Net Profit

Let us use this table in assessing the performance of the various models because it is simpler to explain to
decision-makers who are used to thinking of their decision in terms of net profits.

Assignment

1. Review the predictor variables and guess from their definition at what their role might be in a credit
decision. Are there any surprises in the data?

2. Divide the data randomly into training (60%) and validation (40%) partitions, and develop classification
models using the following data mining techniques in XLMiner:
Logistic regression
Classification trees
Neural networks
Discriminant Analysis.
3. Choose one model from each technique and report the confusion matrix and the cost/gain matrix for the
validation data. For the logistic regression model use a cutoff predicted probability of success
("success"=1) of 0.5. Which technique gives the most net profit on the validation data?
4. Let's see if we can improve our performance by changing the cutoff. Rather than accepting XLMiner's
initial classification of everyone's credit status, let's use the "predicted probability of success" in logistic
regression as a basis for selecting the best credit risks first, followed by poorer risk applicants.
a. Sort the validation data on "predicted probability of success."
b. For each validation case, calculate the actual cost/gain of extending credit.
c. Add another column for cumulative net profit.
d. How far into the validation data do you go to get maximum net profit? (Often this is specified as a
percentile or rounded to deciles.)
e. If this logistic regression model is scored to future applicants, what "probability of success" cutoff
should be used in extending credit?