Understanding Variability in Credit Score Predictions

Credit Risk Analytics

Bootstrapping

Published

November 15, 2024

Credit scoring models work well in the middle of the score distribution but often become less reliable at the extremes where data is sparse. This post shows how to use bootstrapping to measure prediction variability across different score ranges – helping you identify where your model is most dependable.

Why Estimation Variance Matters

Smaller sample sizes lead to higher variance in estimates, especially for extreme values. While statistics like means remain stable with limited data, tail percentiles (95th, 99th) show much more volatility. This matters for credit scoring, where very high and very low scores represent these unstable tail regions.

# Number of samples to be drawn from a probability distribution
n_samples <- 1000

# Number of times, sampling should be repeated
repeats <- 100

# Mean and std-dev for a standard normal distribution
mu <- 5
std_dev <- 2

# Sample
samples <- rnorm(n_samples * repeats, mean = 10)

# Fit into a matrix like object with `n_samples' number of rows 
# and `repeats` number of columns
samples <- matrix(samples, nrow = n_samples, ncol = repeats)

# Compute mean across each column
sample_means <- apply(samples, 1, mean)

# Similarly, compute 75% and 95% quantile across each column
sample_75_quantile <- apply(samples, 1, quantile, p = 0.75)
sample_95_quantile <- apply(samples, 1, quantile, p = 0.95)
sample_99_quantile <- apply(samples, 1, quantile, p = 0.99)

# Compare coefficient of variation
sd(sample_means)/mean(sample_means)

[1] 0.009901152

sd(sample_75_quantile)/mean(sample_75_quantile)

[1] 0.0125036

sd(sample_95_quantile)/mean(sample_75_quantile)

[1] 0.01979541

# Plot the distributions
combined_vec <- c(sample_means, sample_75_quantile, sample_95_quantile, sample_99_quantile)

plot(density(sample_means), 
     col = "#6F69AC", 
     lwd = 3, 
     main = "Estimating the mean vs tail quantiles", 
     xlab = "", 
     xlim = c(min(combined_vec), max(combined_vec)))

lines(density(sample_75_quantile), col = "#95DAC1", lwd = 3)
lines(density(sample_95_quantile), col = "#FFEBA1", lwd = 3)
lines(density(sample_99_quantile), col = "#FD6F96", lwd = 3)
grid()

legend("topright", 
       fill = c("#6F69AC", "#95DAC1", "#FFEBA1", "#FD6F96"), 
       legend = c("Mean", "75% Quantile", "95% Quantile", "99% Quantile"), 
       cex = 0.7)

The plot shows how uncertainty increases dramatically when estimating extreme values. The distribution for the mean (purple) is much narrower than for the 99th percentile (pink). This directly translates to credit scoring – where very high or low scores have greater uncertainty.

# Load required packages
library(dplyr)
library(magrittr)
library(rsample)
library(ggplot2)

Data Acquisition and Preprocessing

# Load sample data (sample of the lending club data)
sample <- read.csv("http://bit.ly/42ypcnJ")

# Mark which loan status will be tagged as default
codes <- c("Charged Off", "Does not meet the credit policy. Status:Charged Off")

# Apply above codes and create target
sample %<>% mutate(bad_flag = ifelse(loan_status %in% codes, 1, 0))

# Replace missing values with a default value
sample[is.na(sample)] <- -1

# Get summary tally
table(sample$bad_flag)


   0    1 
8838 1162

We’re using Lending Club data with charged-off loans marked as defaults. The class imbalance shown is typical in credit portfolios and contributes to prediction challenges at distribution extremes.

Implementing Bootstrap Resampling Strategy

We’ll create 100 bootstrap samples to measure how model predictions vary across the score range. This technique creates multiple simulated datasets to measure prediction uncertainty without collecting additional data.

# Create 100 samples
boot_sample <- bootstraps(data = sample, times = 100)

head(boot_sample, 3)

# A tibble: 3 × 2
  splits               id          
  <list>               <chr>       
1 <split [10000/3720]> Bootstrap001
2 <split [10000/3699]> Bootstrap002
3 <split [10000/3682]> Bootstrap003

# Each row represents a separate bootstrapped sample with an analysis set and assessment set
boot_sample$splits[[1]]

<Analysis/Assess/Total>
<10000/3720/10000>

# Show the first 5 rows and 5 columns of the first sample
analysis(boot_sample$splits[[1]]) %>% .[1:5, 1:5]

     V1        id member_id loan_amnt funded_amnt
1 16126  71117762        -1      8950        8950
2 66413  40564449        -1     23600       23600
3 30813 129473203        -1     16000       16000
4 70186  99984740        -1      6000        6000
5 60834  71296844        -1      9000        9000

Each bootstrap sample contains random draws (with replacement) from our original data, creating slight variations that reveal model sensitivity to different data compositions.

Developing the Predictive Model Framework

We’ll use logistic regression – the standard for credit risk models due to its interpretability and regulatory acceptance. Our model includes typical credit variables like loan amount, income, and credit history metrics.

glm_model <- function(df){
  
  # Fit a simple model with a set specification
  mdl <- glm(bad_flag ~
               loan_amnt + funded_amnt + annual_inc + delinq_2yrs +
               inq_last_6mths + mths_since_last_delinq + fico_range_low +
               mths_since_last_record + revol_util + total_pymnt,
             family = "binomial",
             data = df)
  
  # Return fitted values
  return(predict(mdl))
}

# Test the function
# Retrieve a data frame
train <- analysis(boot_sample$splits[[1]])

# Predict
pred <- glm_model(train)

# Check output
range(pred)  # Output is on log odds scale

[1] -12.366190   1.509623

The function returns predictions in log-odds, which we’ll later convert to a more intuitive credit score scale.

Iterative Model Training and Prediction Collection

# First apply the glm fitting function to each of the sample
# Note the use of lapply
output <- lapply(boot_sample$splits, function(x){
  train <- analysis(x)
  pred <- glm_model(train)

  return(pred)
})

# Collate all predictions into a vector 
boot_preds <- do.call(c, output)
range(boot_preds)

[1] -139.663453    3.828948

# Get outliers
q_high <- quantile(boot_preds, 0.99)
q_low <- quantile(boot_preds, 0.01)

# Truncate the overall distribution to within the lower 1% and upper 1% quantiles
# Doing this since it creates issues later on when scaling the output
boot_preds[boot_preds > q_high] <- q_high
boot_preds[boot_preds < q_low] <- q_low

range(boot_preds)

[1] -5.065868 -0.209924

# Convert to a data frame
boot_preds <- data.frame(pred = boot_preds, 
                         id = rep(1:length(boot_sample$splits), each = nrow(sample)))
head(boot_preds)

       pred id
1 -2.163334  1
2 -2.914808  1
3 -1.974614  1
4 -1.918327  1
5 -2.168293  1
6 -0.209924  1

We apply our model to each bootstrap sample and collect the predictions, then truncate extreme values (beyond 1st and 99th percentiles) to remove outliers – similar to capping techniques used in production credit models.

Transforming Predictions to Credit Score Scale

Now we’ll convert log-odds to a recognizable credit score using the industry-standard Points to Double Odds (PDO) method. Using parameters similar to real credit systems (PDO=30, Anchor=700), we transform our predictions into intuitive scores where higher numbers indicate lower risk.

scaling_func <- function(vec, PDO = 30, OddsAtAnchor = 5, Anchor = 700){
  beta <- PDO / log(2)
  alpha <- Anchor - PDO * OddsAtAnchor
  
  # Simple linear scaling of the log odds
  scr <- alpha - beta * vec  
  
  # Round off
  return(round(scr, 0))
}

boot_preds$scores <- scaling_func(boot_preds$pred, 30, 2, 700)

# Chart the distribution of predictions across all the samples
ggplot(boot_preds, aes(x = scores, color = factor(id))) + 
  geom_density() + 
  theme_minimal() + 
  theme(legend.position = "none") + 
  scale_color_grey() + 
  labs(title = "Predictions from bootstrapped samples", 
       subtitle = "Density function", 
       x = "Predictions (Log odds)", 
       y = "Density")

Each gray line shows the score distribution from a different bootstrap sample. Where lines cluster tightly, our predictions are stable; where they diverge, we have higher uncertainty.

Quantifying Prediction Uncertainty Across Score Ranges

Now we can directly measure how prediction reliability varies across score ranges by calculating standard deviation within each score bin. This approach quantifies uncertainty at different score levels.

# Create bins using quantiles
breaks <- quantile(boot_preds$scores, probs = seq(0, 1, length.out = 20))
boot_preds$bins <- cut(boot_preds$scores, breaks = unique(breaks), include.lowest = T, right = T)

# Chart standard deviation of model predictions across each score bin
boot_preds %>%
  group_by(bins) %>%
  summarise(std_dev = sd(scores)) %>%
  ggplot(aes(x = bins, y = std_dev)) +
  geom_col(color = "black", fill = "#90AACB") +
  theme_minimal() + 
  theme(axis.text.x = element_text(angle = 90)) + 
  theme(legend.position = "none") + 
  labs(title = "Variability in model predictions across samples", 
       subtitle = "(measured using standard deviation)", 
       x = "Score Range", 
       y = "Standard Deviation")

As expected, the model’s predictions are more reliable within a certain range of values (700-800) whereas there is significant variability in the model’s predictions in the lowest and highest score buckets.

The chart reveals a clear “U-shape” pattern of prediction variability—a common phenomenon in credit risk modeling. The highest uncertainty appears in the extreme score ranges (very high and very low scores), while predictions in the middle range show greater stability. The chart confirms our hypothesis: variability is highest at score extremes and lowest in the middle range (600-800). This directly informs credit policy – scores in the middle range are most reliable, while decisions at the extremes should incorporate additional caution due to higher uncertainty.

These findings have direct business applications:

For extremely high scores, add verification steps before auto-approval
For very low scores, consider manual review rather than automatic rejection

Advanced Approach: Isolating Training Data Effects

Credit: Richard Warnung

For a more controlled analysis, we can train models on bootstrap samples but evaluate them on the same validation set. This isolates the impact of training data variation:

Vs <- function(boot_split){
  # Train model on the bootstrapped data
  train <- analysis(boot_split)
  
  # Fit model
  mdl <- glm(bad_flag ~
               loan_amnt + funded_amnt + annual_inc + delinq_2yrs +
               inq_last_6mths + mths_since_last_delinq + fico_range_low +
               mths_since_last_record + revol_util + total_pymnt,
             family = "binomial",
             data = train)
  
  # Apply to a common validation set
  validate_preds <- predict(mdl, newdata = validate_set)
  
  # Return predictions
  return(validate_preds)
}

This method provides a clearer picture of how variations in training data affect model predictions, which is valuable when evaluating model updates in production.

Create overall training and testing datasets

id <- sample(1:nrow(sample), size = nrow(sample)*0.8, replace = F)

train_data <- sample[id,] test_data <- sample[-id,]

Bootstrapped samples are now pulled only from the overall training dataset

boot_sample <- bootstraps(data = train_data, times = 80)

Using the same function from before but predicting on the same test dataset

glm_model <- function(train, test){

mdl <- glm(bad_flag ~ loan_amnt + funded_amnt + annual_inc + delinq_2yrs + inq_last_6mths + mths_since_last_delinq + fico_range_low + mths_since_last_record + revol_util + total_pymnt, family = “binomial”, data = train)

# Return fitted values on the test dataset return(predict(mdl, newdata = test)) }

Apply the glm fitting function to each of the sample

But predict on the same test dataset

output <- lapply(boot_sample$splits, function(x){ train <- analysis(x) pred <- glm_model(train, test_data)

return(pred) })