Predicting Debt Payment Defaults With No-Code Classification Algorithms

“Credit Cards and Cash” by Sean MacEntee is licensed under CC BY 2.0

Predicting the likelihood of future events like fraud or payment defaults is a classic use-case of machine learning. With its drag-and-drop interface, Monument makes it easier than ever to tackle this classification problem. In this tutorial, in a matter of minutes, we will use real-world data on credit card default probability to train an algorithm to detect payment defaults.

Obtaining & Inspecting The Data

In the “Data Folder” of the University of California-Irvine repository linked above, there is a file called . When we open it up in a spreadsheet, it looks like this:

The raw data.

Currently, Monument only supports one header row, but this file has two header rows. We’ll make a quick edit to attach the , , etc. headers in the first row to the headers of the second row. Our result looks like this:

Much better :)

Most of the 25 columns contain demographic and transaction information on 30,000 credit card users. We’re going to use all of this information to train an algorithm to predict future defaults.

The last column, , is the most important. The values in this column are either for “will default next month” or for “will not default next month.” Because this is historical data, we are certain about these outcomes. This kind of historical data is necessary for training an algorithm to forecast outcomes when the future is unknown.

To simulate an unknown future, we’re going to duplicate this last column (), add it to the end of the data (), and delete the first 100 values of the “example” column.

By deleting the first 100 rows, we’re simulating the existence of 100 new transactions and using the other 29,900 rows to train the algorithm. This “controlled setting” allows us to assess the effectiveness of the model we’re going to build.

We duplicated Column Y, then deleted the first 100 values in the copy in Column Z.

With my training data now formatted properly, we saved it in CSV format and imported it into Monument.

Using No-Code Classification Algorithms To Detect Future Defaults

Let’s import the CSV into Monument and chart a few of the columns to get a sense of what’s happening in the data. Let’s make sure that we select the chart style using the widget in the top right corner of the chart area.

This menu is found in the MODEL tab.

When we have plotted some of the data pills and switched to grid view, we see something like this.

Let’s see if we can predict the payment defaults.

Our goal is to train an algorithm to use the attributes in the first 25 columns to correctly detect whether a user will or will not default in the next month. Let’s drag the algorithm pull from the ALGORITHMS area and drop it onto the “example” column. LightGBM is short for “Light Gradient Boosted Machine,” and is a widely-used classification algorithm.

Not a great initial result :/

The default LightGBM parameters do not give a great result. The initial prediction is for every row; when the value changes between and , there is no corresponding change in our prediction.

The best place to start improving the model is to click the INDEPENDENTS button in the drop-down menu on the algorithm pill and select all the columns. This will use the selected columns as independent variables, with the expectation that at least some of them have explanatory power in determining the dependent variable — what we’re trying to predict, i.e. whether the person will default next month.

Let’s select all the columns!

(Note: we don’t select the last column, which is the real data, as the model would then use the real-world results to predict the simulated forecast, giving us an ostensibly strong model that actually has no predictive power in unknown situations. This would be an extreme example of “overfitting,” a concept we’ll cover in a future tutorial.)

Next, let’s look at the parameters. The picture below shows the default parameters for Monument’s LightGBM algorithm.

LightGBM’s default parameters.

Each of the parameters listed will have some effect on the outcome. You can hover over the information icon next to each parameter to read more about what it does.

A good place to start with adjusting the LightGBM parameters are:

  • Lambda helps reduce overfitting.
  • Gamma produces simpler models the higher it is set. This reduces the danger of overfitting on your sample data.
  • Maximum Leaf Count also reduces overfitting the higher its setting.
  • Learning Rate sets the fraction of new predictions in a training cycle that are calibrated by previous predictions.

In this case, we also made slight adjustments to Training Epochs (to increase the number of training cycles available to tune the model), Bagging Fraction (to increase the percent of data randomly sampled in each training cycle), and Minimum Element Per Leaf (to increase the number of datapoints assigned to each leaf, thereby reducing overfitting).

Adjusted algorithm parameters.

When we adjust the parameters as above and click OK to re-run LightGBM, we get the following results. The significant difference you’ll see here is that the s in the first column get picked up as above or above and the s get picked up as .

Starting to learn!

This is an indication that it’s predicting something. You can probably improve the model by experimenting further with the parameters to widen the difference between the predicted default and no-default values. But the current model is correctly detecting some distinction and in many real-world business cases where you need results fast, it’s likely good enough.

Where To Go From Here

In a matter of minutes, we pulled in raw transaction data and trained an effective classification model to predict payment defaults. This unlocks new, data-driven decisions in a business context.

  1. Immediately, you can now predict future defaults. The most obvious result is now you have a model for forecasting future defaults. When next month’s data transaction data comes in, you can simply apply the algorithm you created above to get a sense of what customers you might proactively reach out to to get them on a payment plan.
  2. You can also use these results to frame further research to uncover the characteristics of defaulters/non-defaulters. In particular, you can use the Forecast Importance Table — available by clicking the menu icon in the top right corner of the INFO box — to see which features are most indicative of specific outcomes. Perhaps, this a significant driver of defaults warrants further data collection.
Access the Forecast Importance Table via the icon in the INFO box.

The fact that the Forecast Training Convergence chart is still (slightly) downward sloping also suggests that you can continue to improve the performance of the model by increasing the number of Training Rounds in the PARAMETERS menu.

It looks like there are more gains to be had :)

You can also use a nearly identical approach on a number of other kinds of problems, including:

  • Forecasting next quarter’s balance sheet, line by line,
  • Inferring the probability that a consumer is likely to purchase a specific product based on past purchases, and
  • Classifying individuals or firms based on their characteristics to guide advertising or further research.

The ability to build no-code models like this allows you to quickly iterate so that you can maximize the time you spend considering the business implications of your results, rather than get lost in a time-consuming and expensive modeling process. It also allows small teams to dynamically monitor and update models as needed to keep up with ever-changing business environments.

Interested in learning more about Monument? Book a free introductory Zoom call here.

Predictions to keep you two steps ahead.

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