Customer credit scoring using a hybrid data mining approach

Purpose A crucial decision in financial services is how to classify credit or loan applicants into good and bad applicants. The purpose of this paper is to propose a four-stage hybrid data mining approach to support the decision-making process.Design/methodology/approach The approach is inspired by the bagging ensemble learning method and proposes a new voting method, namely two-level majority voting in the last stage. First some training subsets are generated. Then some different base classifiers are tuned and afterward some ensemble methods are applied to strengthen tuned classifiers. Finally, two-level majority voting schemes help the approach to achieve more accuracy.Findings A comparison of results shows the proposed model outperforms powerful single classifiers such as multilayer perceptron (MLP), support vector machine, logistic regression (LR). In addition, it is more accurate than ensemble learning methods such as bagging-LR or rotation forest (RF)-MLP. The model outperforms single classifiers in terms of type I and II errors; it is close to some ensemble approaches such as bagging-LR and RF-MLP but fails to outperform them in terms of type I and II errors. Moreover, majority voting in the final stage provides more reliable results.Practical implications The study concludes the approach would be beneficial for banks, credit card companies and other credit provider organisations.Originality/value A novel four stages hybrid approach inspired by bagging ensemble method proposed. Moreover the two-level majority voting in two different schemes in the last stage provides more accuracy. An integrated evaluation criterion for classification errors provides an enhanced insight for error comparisons.