Understanding credit
risk
CREDIT RIS K MODELIN G IN P YTH ON
Michael Crabtree
Data Scientist, Ford Motor Company
What is credit risk?
The possibility that someone who has borrowed money will not repay it all
Calculated risk difference between lending someone money and a government bond
When someone fails to repay a loan, it is said to be in default
The likelihood that someone will default on a loan is the probability of default (PD)
CREDIT RISK MODELING IN PYTHON
What is credit risk?
The possibility that someone who has borrowed money will not repay it all
Calculated risk difference between lending someone money and a government bond
When someone fails to repay a loan, it is said to be in default
The likelihood that someone will default on a loan is the probability of default (PD)
Payment Payment Date Loan Status
$100 Jun 15 Non-Default
$100 Jul 15 Non-Default
$0 Aug 15 Default
CREDIT RISK MODELING IN PYTHON
Expected loss
The dollar amount the rm loses as a result of loan default
Three primary components:
Probability of Default (PD)
Exposure at Default (EAD)
Loss Given Default (LGD)
Formula for expected loss:
expected_loss = PD * EAD * LGD
CREDIT RISK MODELING IN PYTHON
Types of data used
Two Primary types of data used:
Application data
Behavioral data
Application Behavioral
Interest Rate Employment Length
Grade Historical Default
Amount Income
CREDIT RISK MODELING IN PYTHON
Data columns
Mix of behavioral and application Column Column
Contain columns simulating credit bureau data
Income Loan grade
Age Loan amount
Home ownership Interest rate
Employment length Loan status
Loan intent Historical default
Percent Income Credit history length
CREDIT RISK MODELING IN PYTHON
Exploring with cross tables
pd.crosstab(cr_loan['person_home_ownership'], cr_loan['loan_status'],
values=cr_loan['loan_int_rate'], aggfunc='mean').round(2)
CREDIT RISK MODELING IN PYTHON
Exploring with visuals
plt.scatter(cr_loan['person_income'], cr_loan['loan_int_rate'],c='blue', alpha=0.5)
plt.xlabel("Personal Income")
plt.ylabel("Loan Interest Rate")
plt.show()
CREDIT RISK MODELING IN PYTHON
Let's practice!
CREDIT RIS K MODELIN G IN P YTH ON
Outliers in Credit
Data
CREDIT RIS K MODELIN G IN P YTH ON
Michael Crabtree
Data Scientist, Ford Motor Company
Data processing
Prepared data allows models to train faster
Often positively impacts model performance
CREDIT RISK MODELING IN PYTHON
Outliers and performance
Possible causes of outliers:
Problems with data entry systems (human error)
Issues with data ingestion tools
CREDIT RISK MODELING IN PYTHON
Outliers and performance
Possible causes of outliers:
Problems with data entry systems (human error)
Issues with data ingestion tools
Feature Coef cient With Outliers Coef cient Without Outliers
Interest Rate 0.2 0.01
Employment Length 0.5 0.6
Income 0.6 0.75
CREDIT RISK MODELING IN PYTHON
Detecting outliers with cross tables
Use cross tables with aggregate functions
pd.crosstab(cr_loan['person_home_ownership'], cr_loan['loan_status'],
values=cr_loan['loan_int_rate'], aggfunc='mean').round(2)
CREDIT RISK MODELING IN PYTHON
Detecting outliers visually
Detecting outliers visually
Histograms
Scatter plots
CREDIT RISK MODELING IN PYTHON
Removing outliers
Use the .drop() method within Pandas
indices = cr_loan[cr_loan['person_emp_length'] >= 60].index
cr_loan.drop(indices, inplace=True)
CREDIT RISK MODELING IN PYTHON
Let's practice!
CREDIT RIS K MODELIN G IN P YTH ON
Risk with missing
data in loan data
CREDIT RIS K MODELIN G IN P YTH ON
Michael Crabtree
Data Scientist, Ford Motor Company
What is missing data?
NULLs in a row instead of an actual value
An empty string ''
Not an entirely empty row
Can occur in any column in the data
CREDIT RISK MODELING IN PYTHON
Similarities with outliers
Negatively affect machine learning model performance
May bias models in unanticipated ways
May cause errors for some machine learning models
CREDIT RISK MODELING IN PYTHON
Similarities with outliers
Negatively affect machine learning model performance
May bias models in unanticipated ways
May cause errors for some machine learning models
Missing Data Type Possible Result
NULL in numeric column Error
NULL in string column Error
CREDIT RISK MODELING IN PYTHON
How to handle missing data
Generally three ways to handle missing data
Replace values where the data is missing
Remove the rows containing missing data
Leave the rows with missing data unchanged
Understanding the data determines the course of action
CREDIT RISK MODELING IN PYTHON
How to handle missing data
Generally three ways to handle missing data
Replace values where the data is missing
Remove the rows containing missing data
Leave the rows with missing data unchanged
Understanding the data determines the course of action
Missing Data Interpretation Action
NULL in loan_status Loan recently approved Remove from prediction data
NULL in person_age Age not recorded or disclosed Replace with median
CREDIT RISK MODELING IN PYTHON
Finding missing data
Null values are easily found by using the isnull() function
Null records can easily be counted with the sum() function
.any() method checks all columns
null_columns = cr_loan.columns[cr_loan.isnull().any()]
cr_loan[null_columns].isnull().sum()
# Total number of null values per column
person_home_ownership 25
person_emp_length 895
loan_intent 25
loan_int_rate 3140
cb_person_default_on_file 15
CREDIT RISK MODELING IN PYTHON
Replacing Missing data
Replace the missing data using methods like .fillna() with aggregate functions and methods
cr_loan['loan_int_rate'].fillna((cr_loan['loan_int_rate'].mean()), inplace = True)
CREDIT RISK MODELING IN PYTHON
Dropping missing data
Uses indices to identify records the same as with outliers
Remove the records entirely using the .drop() method
indices = cr_loan[cr_loan['person_emp_length'].isnull()].index
cr_loan.drop(indices, inplace=True)
CREDIT RISK MODELING IN PYTHON
Let's practice!
CREDIT RIS K MODELIN G IN P YTH ON
