Overview
Credit Scoring refers to the process of assigning a finite set of credit scores to a loan portfolio. For example, you could assign a numeric value of 1 to 5 to each loan, indicating its credit worthiness. Scores can be assigned based on different possible methodolgies, including the following:
After a scoring method is constructed, a system of scores is typically tested using a set of Diagnostics.
Default Correlations
Once a portfolio of loans has been assigned into different grades based on assessed credit worthiness, the correlation of default needs to be estimated in order to build a proper credit risk model. The Maximum Likelihood methodlogy shows a possible method to measure those correlations.