A novel credit scoring system in financial institutions using artificial intelligence technology

Abstract

In order to evaluate a person’s or a company’s creditworthiness, financial institutions must use credit scoring. Traditional credit scoring algorithms frequently rely on manual and rule-based methods, which can be tedious and inaccurate. Recent developments in artificial intelligence (AI) technology have opened up possibilities for creating more reliable and effective credit rating systems. The data are pre-processed, including scaling using the 0–1 normalization method and resolving missing values by imputation. Information gain (IG), gain ratio (GR), and chi-square are three feature selection methodologies covered in the study. While GR normalizes IG by dividing it by the total entropy of the feature, IG quantifies the reduction in total entropy by adding a new feature. Based on chi-squared statistics, the most vital traits are determined using chi-square. This research employs different ML models to develop a hybrid model for credit score prediction. The ML algorithms support vector machine (SVM), neural networks (NNs), decision trees (DTs), random forest (RF), and logistic regression (LR) classifiers are employed here for experiments along with IG, GR, and chi-square feature selection methodologies for credit prediction over Australian and German datasets. The study offers an understanding of the decision-making process for informative characteristics and the functionality of machine learning (ML) in credit prediction tasks. The empirical analysis shows that in the case of the German dataset, the DT with GR feature selection and hyperparameter optimization outperforms SVM and NN with an accuracy of 99.78%. For the Australian dataset, SVM with GR feature selection outperforms NN and DT with an accuracy of 99.98%.