Approval policy

Approval score threshold: 600

This case study models 1000 loan applicants, each with a credit score correlated with their true default risk, though not perfectly. Applicants scoring above the threshold are approved. A lower threshold approves more applicants (more revenue from interest) but also approves more who will default (losses).

Portfolio outcome

Approved—

Defaults among approved—

Net portfolio profit—

Applicants by credit score (green = approved, red ring = will default)