INTEROFFICE ME MORANDU M

TO: PROFESSOR MCCLINTOCK

FROM: MEGAN LEE

SUBJECT: CHAPTER 17 LAB

DATE: NOVEMBER 14 2018

Introduction
In this document, models were ran to predict both credit card limit and the likelihood of
someone defaulting on a loan. Specifically, we ran two regression models with dummy
variables for predicting limit as well as likelihood of someone defaulting on a loan based
on various variables.

Data Analysis
Regression equation:
̂
𝐶𝑟𝑒𝑑𝑖𝑡 𝐿𝑖𝑚𝑖𝑡 = −22.94 + 302.61(𝑓𝑒𝑚𝑎𝑙𝑒) + 921.43(𝑢𝑛𝑖𝑣𝑒𝑟𝑠𝑖𝑡𝑦)
+ 3237.61(𝑔𝑟𝑎𝑑 𝑠𝑐ℎ𝑜𝑜𝑙) + 2930.03(𝑚𝑎𝑟𝑟𝑖𝑒𝑑)
− 57.14(𝑚𝑎𝑟𝑟𝑖𝑒𝑑 ∗ 𝑎𝑔𝑒) + 101.50(𝑎𝑔𝑒)

Interpretation of R-squared:
We are 10.91% of the way to perfectly predicting credit limit using the variables in the
model.

Interpretation of coefficients:
Since all of the variables have low p-values, we can conclude that all explanatory
variables can be used.
Females will have a $302 higher credit limit than men, on average all else constant.
As age increases by 1 for single people, credit limit increases by $101.50, on average all
else constant.
As age increases by 1 for married people, credit limit increases by $44.36, on average all
else constant.
As age increase by 1 for single people, credit limit increases $57.14 more than for a
married person.

Predict limit of a 35-year-old, married, female with a university degree:

-22.94 + 302.61(1) + 921.43(1) + 3237.61(0) + 2930.03(1) – 57.14(35*1) +101.50(35) =
$5683.73

𝑙𝑖𝑘𝑒𝑙𝑖ℎ𝑜𝑜𝑑 ̂
𝑜𝑓 𝑑𝑒𝑓𝑎𝑢𝑙𝑡𝑖𝑛𝑔 = .208+0.00000448(Average bill amount) – 0.00014(average
previous payment amount + 0.000831(age)

2
Interpretation of R-squared:
We are 11.25% of the way to perfectly predicting someone’s probability of defaulting on
a payment using the variables in the model.

Interpretations of coefficients:
As average bill amount increases by $100, the chance of defaulting increase by .0448
percentage points, on average all else constant.
As age increases by 1, likelihood of defaulting increases by .0831 percentage points, on
average all else constant.

Predict the chance of someone defaulting who is 40 years old, has an average bill amount
of $1500, and average payments of $700:
.208 + 0.00000448(1500) – 0.00014(700) +0.000831(40) = 0.14996

There is a 15% chance that someone who is 40 years old with an average bill amount of
$1500 and average previous payments of $700 will default on their payment.

Conclusion
Two regression models were ran two with dummy variables for predicting limit as well as
likelihood of someone defaulting on a loan based on various variables. Because of both
of their low R-square, I would not suggest using either of these models.