Supervised Learning Model: Credit Risk Prediction
Problem Statement:
A bank wants to develop a system that can predict the credit risk of its customers based on their credit history, demographic information, and other relevant factors. The goal is to identify high-risk customers and take proactive measures to minimize potential losses.
Dataset:
The dataset consists of 10,000 customer records, each with the following features:
Demographic information:
Age
Income
Employment status
Education level
Credit history:
Credit score
Payment history (on-time, late, or missed)
Credit utilization ratio
Account information:
Account balance
Account type (checking, savings, or credit card)
Target variable:
Credit risk (low, medium, or high)
Designing the Model:
Data Preprocessing:
Handle missing values using mean, median, or imputation techniques
Normalize/scale numerical features using StandardScaler or MinMaxScaler
Encode categorical features using One-Hot Encoding or Label Encoding
Feature Engineering:
Extract relevant features from existing ones (e.g., credit score vs. credit utilization ratio)
Create new features using domain knowledge (e.g., debt-to-income ratio)
Model Selection:
Choose a suitable supervised learning algorithm (e.g., Logistic Regression, Decision Trees, Random Forest, or Support Vector Machines)
Consider ensemble methods (e.g., Bagging, Boosting) for improved performance
Model Evaluation:
Split the dataset into training (~70%) and testing sets (~30%)
Evaluate the model using metrics such as accuracy, precision, recall, F1-score, and ROC-AUC
Implementation: