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Analysis
Analyst
2025-05-28

1. Business Problem Definition and Objective

1.1 Business Context
In the highly competitive banking industry, customer retention is a critical concern. Acquiring new customers is
costly, so it’s often more profitable to retain existing ones. This dataset focuses on credit card users, and the
bank has noticed that a segment of its customers are closing their credit card accounts (also called “churning”).

Each churned customer represents a loss in long-term revenue, and possibly signals a broader issue in service,
satisfaction, or risk management. The goal is to identify patterns that predict churn before it happens, so the
bank can take preventive action — such as personal follow-up, offers, or upgrades.

1.2 Machine Learning Objective

The main goal of this analysis is to predict whether a customer will churn, based on their profile and recent
account activity.

This makes it a binary classification task where: - Target variable: Churn (1 = customer left, 0 = customer
stayed) - Input variables: age, income, credit usage, transaction patterns, etc.

A successful model would allow the bank to: - Detect customers at risk of churn - Intervene early and improve
retention

2. Summary of Analysis Steps

To answer this business question using data science, the following steps will be taken:

2.1 Data Preparation

Load and inspect the dataset (structure, types, completeness)
Remove irrelevant features (e.g. IDs, previous model scores)
Explore each variable using descriptive statistics and visualizations
Handle outliers and assess whether to remove or retain them
Encode categorical variables into usable numerical form

2.2 Feature Engineering & Dimensionality Reduction

Create or transform variables that might improve model performance
Apply Principal Component Analysis (PCA) to reduce dimensionality and avoid noise
Consider clustering to see if customer segments relate to churn

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2.3 Modelling
Select and train two machine learning models (e.g. Logistic Regression and Random Forest)
Evaluate each using key metrics: Accuracy, Precision, Recall, F1-Score
Discuss differences in model logic and behavior
Attempt hyperparameter tuning or ensembling to improve results

2.4 Conclusion & Recommendations

Highlight practical actions the bank can take using the model
Discuss model limitations and risks (e.g. data bias, changing customer behavior)
Recommend next steps (e.g. continuous monitoring, new data sources, A/B testing)

2. Data Loading and Cleaning

We begin by loading the necessary libraries and importing the dataset.

library(tidyverse) # Includes ggplot2, dplyr, tidyr, readr

library(ggplot2)

df <- read_csv("BankChurners.csv")
head(df)

## # A tibble: 6 × 23
## CLIENTNUM Attrition_Flag Customer_Age Gender Dependent_count Education_Level
## <dbl> <chr> <dbl> <chr> <dbl> <chr>
## 1 768805383 Existing Custom… 45 M 3 High School
## 2 818770008 Existing Custom… 49 F 5 Graduate
## 3 713982108 Existing Custom… 51 M 3 Graduate
## 4 769911858 Existing Custom… 40 F 4 High School
## 5 709106358 Existing Custom… 40 M 3 Uneducated
## 6 713061558 Existing Custom… 44 M 2 Graduate
## # ℹ 17 more variables: Marital_Status <chr>, Income_Category <chr>,
## # Card_Category <chr>, Months_on_book <dbl>, Total_Relationship_Count <dbl>,
## # Months_Inactive_12_mon <dbl>, Contacts_Count_12_mon <dbl>,
## # Credit_Limit <dbl>, Total_Revolving_Bal <dbl>, Avg_Open_To_Buy <dbl>,
## # Total_Amt_Chng_Q4_Q1 <dbl>, Total_Trans_Amt <dbl>, Total_Trans_Ct <dbl>,
## # Total_Ct_Chng_Q4_Q1 <dbl>, Avg_Utilization_Ratio <dbl>,
## # Naive_Bayes_Classifier_Attrition_Flag_Card_Category_Contacts_Count_12_mon_Dependent_count
_Education_Level_Months_Inactive_12_mon_1 <dbl>, …

2.1 Initial Inspection

Let’s take a first look at the structure and summary of the data.

str(df)

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## spc_tbl_ [10,127 × 23] (S3: spec_tbl_df/tbl_df/tbl/data.frame)

## $ CLIENTNUM
: num [1:10127] 7.69e+08 8.19e+08 7.14e+08 7.70e+08 7.09e+08 ...
## $ Attrition_Flag
: chr [1:10127] "Existing Customer" "Existing Customer" "Existing Customer" "Existing Customer"
...
## $ Customer_Age
: num [1:10127] 45 49 51 40 40 44 51 32 37 48 ...
## $ Gender
: chr [1:10127] "M" "F" "M" "F" ...
## $ Dependent_count
: num [1:10127] 3 5 3 4 3 2 4 0 3 2 ...
## $ Education_Level
: chr [1:10127] "High School" "Graduate" "Graduate" "High School" ...
## $ Marital_Status
: chr [1:10127] "Married" "Single" "Married" "Unknown" ...
## $ Income_Category
: chr [1:10127] "$60K - $80K" "Less than $40K" "$80K - $120K" "Less than $40K" ...
## $ Card_Category
: chr [1:10127] "Blue" "Blue" "Blue" "Blue" ...
## $ Months_on_book
: num [1:10127] 39 44 36 34 21 36 46 27 36 36 ...
## $ Total_Relationship_Count
: num [1:10127] 5 6 4 3 5 3 6 2 5 6 ...
## $ Months_Inactive_12_mon
: num [1:10127] 1 1 1 4 1 1 1 2 2 3 ...
## $ Contacts_Count_12_mon
: num [1:10127] 3 2 0 1 0 2 3 2 0 3 ...
## $ Credit_Limit
: num [1:10127] 12691 8256 3418 3313 4716 ...
## $ Total_Revolving_Bal
: num [1:10127] 777 864 0 2517 0 ...
## $ Avg_Open_To_Buy
: num [1:10127] 11914 7392 3418 796 4716 ...
## $ Total_Amt_Chng_Q4_Q1
: num [1:10127] 1.33 1.54 2.59 1.4 2.17 ...
## $ Total_Trans_Amt
: num [1:10127] 1144 1291 1887 1171 816 ...
## $ Total_Trans_Ct
: num [1:10127] 42 33 20 20 28 24 31 36 24 32 ...
## $ Total_Ct_Chng_Q4_Q1
: num [1:10127] 1.62 3.71 2.33 2.33 2.5 ...
## $ Avg_Utilization_Ratio
: num [1:10127] 0.061 0.105 0 0.76 0 0.311 0.066 0.048 0.113 0.144 ...
## $ Naive_Bayes_Classifier_Attrition_Flag_Card_Category_Contacts_Count_12_mon_Dependent_count_
Education_Level_Months_Inactive_12_mon_1: num [1:10127] 9.34e-05 5.69e-05 2.11e-05 1.34e-04 2.17
e-05 ...
## $ Naive_Bayes_Classifier_Attrition_Flag_Card_Category_Contacts_Count_12_mon_Dependent_count_
Education_Level_Months_Inactive_12_mon_2: num [1:10127] 1 1 1 1 1 ...
## - attr(*, "spec")=
## .. cols(
## .. CLIENTNUM = col_double(),

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## .. Attrition_Flag = col_character(),
## .. Customer_Age = col_double(),
## .. Gender = col_character(),
## .. Dependent_count = col_double(),
## .. Education_Level = col_character(),
## .. Marital_Status = col_character(),
## .. Income_Category = col_character(),
## .. Card_Category = col_character(),
## .. Months_on_book = col_double(),
## .. Total_Relationship_Count = col_double(),
## .. Months_Inactive_12_mon = col_double(),
## .. Contacts_Count_12_mon = col_double(),
## .. Credit_Limit = col_double(),
## .. Total_Revolving_Bal = col_double(),
## .. Avg_Open_To_Buy = col_double(),
## .. Total_Amt_Chng_Q4_Q1 = col_double(),
## .. Total_Trans_Amt = col_double(),
## .. Total_Trans_Ct = col_double(),
## .. Total_Ct_Chng_Q4_Q1 = col_double(),
## .. Avg_Utilization_Ratio = col_double(),
## .. Naive_Bayes_Classifier_Attrition_Flag_Card_Category_Contacts_Count_12_mon_Dependent_co
unt_Education_Level_Months_Inactive_12_mon_1 = col_double(),
## .. Naive_Bayes_Classifier_Attrition_Flag_Card_Category_Contacts_Count_12_mon_Dependent_co
unt_Education_Level_Months_Inactive_12_mon_2 = col_double()
## .. )
## - attr(*, "problems")=<externalptr>

summary(df)

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## CLIENTNUM Attrition_Flag Customer_Age Gender

## Min. :708082083 Length:10127 Min. :26.00 Length:10127
## 1st Qu.:713036770 Class :character 1st Qu.:41.00 Class :character
## Median :717926358 Mode :character Median :46.00 Mode :character
## Mean :739177606 Mean :46.33
## 3rd Qu.:773143533 3rd Qu.:52.00
## Max. :828343083 Max. :73.00
## Dependent_count Education_Level Marital_Status Income_Category
## Min. :0.000 Length:10127 Length:10127 Length:10127
## 1st Qu.:1.000 Class :character Class :character Class :character
## Median :2.000 Mode :character Mode :character Mode :character
## Mean :2.346
## 3rd Qu.:3.000
## Max. :5.000
## Card_Category Months_on_book Total_Relationship_Count
## Length:10127 Min. :13.00 Min. :1.000
## Class :character 1st Qu.:31.00 1st Qu.:3.000
## Mode :character Median :36.00 Median :4.000
## Mean :35.93 Mean :3.813
## 3rd Qu.:40.00 3rd Qu.:5.000
## Max. :56.00 Max. :6.000
## Months_Inactive_12_mon Contacts_Count_12_mon Credit_Limit
## Min. :0.000 Min. :0.000 Min. : 1438
## 1st Qu.:2.000 1st Qu.:2.000 1st Qu.: 2555
## Median :2.000 Median :2.000 Median : 4549
## Mean :2.341 Mean :2.455 Mean : 8632
## 3rd Qu.:3.000 3rd Qu.:3.000 3rd Qu.:11068
## Max. :6.000 Max. :6.000 Max. :34516
## Total_Revolving_Bal Avg_Open_To_Buy Total_Amt_Chng_Q4_Q1 Total_Trans_Amt
## Min. : 0 Min. : 3 Min. :0.0000 Min. : 510
## 1st Qu.: 359 1st Qu.: 1324 1st Qu.:0.6310 1st Qu.: 2156
## Median :1276 Median : 3474 Median :0.7360 Median : 3899
## Mean :1163 Mean : 7469 Mean :0.7599 Mean : 4404
## 3rd Qu.:1784 3rd Qu.: 9859 3rd Qu.:0.8590 3rd Qu.: 4741
## Max. :2517 Max. :34516 Max. :3.3970 Max. :18484
## Total_Trans_Ct Total_Ct_Chng_Q4_Q1 Avg_Utilization_Ratio
## Min. : 10.00 Min. :0.0000 Min. :0.0000
## 1st Qu.: 45.00 1st Qu.:0.5820 1st Qu.:0.0230
## Median : 67.00 Median :0.7020 Median :0.1760
## Mean : 64.86 Mean :0.7122 Mean :0.2749
## 3rd Qu.: 81.00 3rd Qu.:0.8180 3rd Qu.:0.5030
## Max. :139.00 Max. :3.7140 Max. :0.9990
## Naive_Bayes_Classifier_Attrition_Flag_Card_Category_Contacts_Count_12_mon_Dependent_count_Ed
ucation_Level_Months_Inactive_12_mon_1
## Min. :7.660e-06
## 1st Qu.:9.898e-05
## Median :1.815e-04
## Mean :1.600e-01
## 3rd Qu.:3.373e-04
## Max. :9.996e-01
## Naive_Bayes_Classifier_Attrition_Flag_Card_Category_Contacts_Count_12_mon_Dependent_count_Ed
ucation_Level_Months_Inactive_12_mon_2
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## Min. :0.00042
## 1st Qu.:0.99966
## Median :0.99982
## Mean :0.84000
## 3rd Qu.:0.99990
## Max. :0.99999

After loading the data, we observe the following:

The dataset has 10,127 rows and 23 columns.

The target column is Attrition_Flag , which we will convert to a binary variable.
Several features are numeric (e.g., Customer_Age , Credit_Limit , Total_Trans_Amt ), while others are
categorical (e.g., Gender , Marital_Status , Card_Category ).
CLIENTNUM is a unique identifier and not useful for prediction.
Two columns starting with Naive_Bayes_Classifier_... are model prediction probabilities from a previous
process, and will be removed for clarity and relevance.
No missing values are reported from this summary, which suggests the dataset is complete.
The variable ranges look reasonable (e.g., age is 26–73, number of dependents is 0–5, utilization ratio is 0–
0.999).

This gives us a solid starting point for cleaning and transforming the data before modeling.

Here is the improved and clearer version of section 2.2 Data Cleaning, with attention to the why, not just the
what, and aligned to your goal of keeping it clear and human-written.

2.2 Data Cleaning

To prepare the dataset for analysis, we take the following steps:

1. Remove CLIENTNUM : This is a unique identifier for each customer. It has no predictive value and may
introduce noise into the model.

2. Drop the two Naive Bayes prediction columns: These are outputs from a past machine learning model
and are not part of the raw customer information. Keeping them would leak information and bias our
analysis.

3. Create a new binary column called Churn :

Customers who have left the credit card service ( Attrition_Flag == "Attrited Customer" ) are
labeled as 1 .
Customers who are still active ( Attrition_Flag == "Existing Customer" ) are labeled as 0 .
4. Remove the original Attrition_Flag column after creating the binary label.

df <- df %>%
select(-CLIENTNUM, -starts_with("Naive_Bayes")) %>%
mutate(
Churn = ifelse(Attrition_Flag == "Attrited Customer", 1, 0)
) %>%
select(-Attrition_Flag)

This results in a cleaned dataset where every column can contribute meaningfully to predicting churn, without
introducing information leakage or ID noise.

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str(df)

## tibble [10,127 × 20] (S3: tbl_df/tbl/data.frame)

## $ Customer_Age : num [1:10127] 45 49 51 40 40 44 51 32 37 48 ...
## $ Gender : chr [1:10127] "M" "F" "M" "F" ...
## $ Dependent_count : num [1:10127] 3 5 3 4 3 2 4 0 3 2 ...
## $ Education_Level : chr [1:10127] "High School" "Graduate" "Graduate" "High School"
...
## $ Marital_Status : chr [1:10127] "Married" "Single" "Married" "Unknown" ...
## $ Income_Category : chr [1:10127] "$60K - $80K" "Less than $40K" "$80K - $120K" "Les
s than $40K" ...
## $ Card_Category : chr [1:10127] "Blue" "Blue" "Blue" "Blue" ...
## $ Months_on_book : num [1:10127] 39 44 36 34 21 36 46 27 36 36 ...
## $ Total_Relationship_Count: num [1:10127] 5 6 4 3 5 3 6 2 5 6 ...
## $ Months_Inactive_12_mon : num [1:10127] 1 1 1 4 1 1 1 2 2 3 ...
## $ Contacts_Count_12_mon : num [1:10127] 3 2 0 1 0 2 3 2 0 3 ...
## $ Credit_Limit : num [1:10127] 12691 8256 3418 3313 4716 ...
## $ Total_Revolving_Bal : num [1:10127] 777 864 0 2517 0 ...
## $ Avg_Open_To_Buy : num [1:10127] 11914 7392 3418 796 4716 ...
## $ Total_Amt_Chng_Q4_Q1 : num [1:10127] 1.33 1.54 2.59 1.4 2.17 ...
## $ Total_Trans_Amt : num [1:10127] 1144 1291 1887 1171 816 ...
## $ Total_Trans_Ct : num [1:10127] 42 33 20 20 28 24 31 36 24 32 ...
## $ Total_Ct_Chng_Q4_Q1 : num [1:10127] 1.62 3.71 2.33 2.33 2.5 ...
## $ Avg_Utilization_Ratio : num [1:10127] 0.061 0.105 0 0.76 0 0.311 0.066 0.048 0.113 0.144
...
## $ Churn : num [1:10127] 0 0 0 0 0 0 0 0 0 0 ...

3. Exploratory Data Analysis (EDA)

Before building any model, it’s important to understand the data — its structure, patterns, ranges, and any unusual
values. This section covers the summary, missing values, feature distributions, and detection of potential outliers.

3.1 Summary Statistics

We start by reviewing the numeric columns. This helps us identify variable ranges, central tendencies, and check
for abnormalities in value scales.

df %>%
select(where(is.numeric)) %>%
summary()

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## Customer_Age Dependent_count Months_on_book Total_Relationship_Count

## Min. :26.00 Min. :0.000 Min. :13.00 Min. :1.000
## 1st Qu.:41.00 1st Qu.:1.000 1st Qu.:31.00 1st Qu.:3.000
## Median :46.00 Median :2.000 Median :36.00 Median :4.000
## Mean :46.33 Mean :2.346 Mean :35.93 Mean :3.813
## 3rd Qu.:52.00 3rd Qu.:3.000 3rd Qu.:40.00 3rd Qu.:5.000
## Max. :73.00 Max. :5.000 Max. :56.00 Max. :6.000
## Months_Inactive_12_mon Contacts_Count_12_mon Credit_Limit
## Min. :0.000 Min. :0.000 Min. : 1438
## 1st Qu.:2.000 1st Qu.:2.000 1st Qu.: 2555
## Median :2.000 Median :2.000 Median : 4549
## Mean :2.341 Mean :2.455 Mean : 8632
## 3rd Qu.:3.000 3rd Qu.:3.000 3rd Qu.:11068
## Max. :6.000 Max. :6.000 Max. :34516
## Total_Revolving_Bal Avg_Open_To_Buy Total_Amt_Chng_Q4_Q1 Total_Trans_Amt
## Min. : 0 Min. : 3 Min. :0.0000 Min. : 510
## 1st Qu.: 359 1st Qu.: 1324 1st Qu.:0.6310 1st Qu.: 2156
## Median :1276 Median : 3474 Median :0.7360 Median : 3899
## Mean :1163 Mean : 7469 Mean :0.7599 Mean : 4404
## 3rd Qu.:1784 3rd Qu.: 9859 3rd Qu.:0.8590 3rd Qu.: 4741
## Max. :2517 Max. :34516 Max. :3.3970 Max. :18484
## Total_Trans_Ct Total_Ct_Chng_Q4_Q1 Avg_Utilization_Ratio Churn
## Min. : 10.00 Min. :0.0000 Min. :0.0000 Min. :0.0000
## 1st Qu.: 45.00 1st Qu.:0.5820 1st Qu.:0.0230 1st Qu.:0.0000
## Median : 67.00 Median :0.7020 Median :0.1760 Median :0.0000
## Mean : 64.86 Mean :0.7122 Mean :0.2749 Mean :0.1607
## 3rd Qu.: 81.00 3rd Qu.:0.8180 3rd Qu.:0.5030 3rd Qu.:0.0000
## Max. :139.00 Max. :3.7140 Max. :0.9990 Max. :1.0000

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From this summary, we can already see:

Customer_Age ranges from 26 to 73, with a median around 46, which suggests
a mature customer base.
Dependent_count ranges from 0 to 5, with a mean of about 2.35, meaning most
customers have 1 to 3 dependents.
Months_on_book ranges from 13 to 56, with a median of 36 months, indicating
most customers have held their card for about 3 years.
Credit_Limit ranges from $1,438 to $34,516, showing a significant variation in
customer credit access.
Total_Revolving_Bal and Avg_Open_To_Buy also range widely, with some
customers using their entire limit and others using none at all.
Total_Amt_Chng_Q4_Q1 ranges from 0 to 3.397, capturing change in spending
between two quarters — large values may be important churn indicators.
Total_Trans_Amt ranges from $510 to $18,484, showing customer spending is
highly varied.
Total_Ct_Chng_Q4_Q1 has some extreme values like 3.714, pointing to potential
outliers.
Avg_Utilization_Ratio ranges from 0 to 0.999, showing that some customers
are maxing out their credit.
The target variable Churn is imbalanced, with a mean of 0.1607, which means
only ~16% of customers churned.

3.2 Missing Values Check

Although summary() didn’t show NAs, we explicitly confirm if any column contains missing values.

colSums(is.na(df))

## Customer_Age Gender Dependent_count

## 0 0 0
## Education_Level Marital_Status Income_Category
## 0 0 0
## Card_Category Months_on_book Total_Relationship_Count
## 0 0 0
## Months_Inactive_12_mon Contacts_Count_12_mon Credit_Limit
## 0 0 0
## Total_Revolving_Bal Avg_Open_To_Buy Total_Amt_Chng_Q4_Q1
## 0 0 0
## Total_Trans_Amt Total_Trans_Ct Total_Ct_Chng_Q4_Q1
## 0 0 0
## Avg_Utilization_Ratio Churn
## 0 0

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A result of all zeros confirms the dataset is complete — there are no missing values to
handle.

3.3 Distribution of Key Numeric Features

We now check the distribution of some important numeric features. This tells us if they are normally distributed or
skewed, which helps guide later transformations.

df %>%
select(
Customer_Age,
Months_on_book,
Credit_Limit,
Avg_Open_To_Buy,
Total_Revolving_Bal,
Total_Amt_Chng_Q4_Q1,
Total_Trans_Amt,
Total_Trans_Ct,
Total_Ct_Chng_Q4_Q1,
Avg_Utilization_Ratio
) %>%
pivot_longer(cols = everything(), names_to = "variable", values_to = "value") %>%
ggplot(aes(x = value)) +
geom_histogram(bins = 30, fill = "steelblue", color = "white") +
facet_wrap(~variable, scales = "free", ncol = 3) +
theme_minimal() +
labs(title = "Histograms of Continuous Numeric Features Only")

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Observations:
Customer_Age is nearly normal, centered around 46 years, with minor left skew.
Months_on_book is mostly symmetric but with a noticeable spike at 36 — likely
a common tenure.
Credit_Limit and Avg_Open_To_Buy are highly right-skewed — many
customers have small limits while a few have very high credit ceilings.
Total_Revolving_Bal shows a large number of customers at 0 balance,
followed by a flat spread — this indicates many customers pay off their full
balance.
Total_Amt_Chng_Q4_Q1 and Total_Ct_Chng_Q4_Q1 both show a concentrated
unimodal peak, meaning most customers fall in a narrow range of quarter-over-
quarter change.
Total_Trans_Amt and Total_Trans_Ct have a bi-modal or clustered shape,
indicating different usage groups (e.g. low vs high spenders).
Avg_Utilization_Ratio is heavily right-skewed with a long tail, showing most
customers use a small portion of their limit, but a few max it out.

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3.4 Outlier Detection

Now, we inspect all numeric variables using boxplots. Outliers show up clearly here.

df %>%
select(
Customer_Age,
Months_on_book,
Credit_Limit,
Avg_Open_To_Buy,
Total_Revolving_Bal,
Total_Amt_Chng_Q4_Q1,
Total_Trans_Amt,
Total_Trans_Ct,
Total_Ct_Chng_Q4_Q1,
Avg_Utilization_Ratio
) %>%
pivot_longer(cols = everything(), names_to = "variable", values_to = "value") %>%
ggplot(aes(y = value)) +
geom_boxplot(outlier.color = "red") +
facet_wrap(~variable, scales = "free", ncol = 3) +
theme_minimal() +
labs(title = "Boxplots for Outlier Detection (Separate Scales)", x = "", y = "Value")

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3.5 Summary of Data Preparation

At this point, we have thoroughly explored and prepared our dataset:

All numeric variables have been reviewed for distribution, range, and potential outliers.
No missing values were found, so no imputation was required.
Outliers were assessed visually and retained intentionally, as they likely represent meaningful customer
behaviors.
The CLIENTNUM and machine-generated columns were removed to prevent noise or data leakage.
The target variable Churn has been clearly defined as a binary outcome.

4. Deep EDA: Understanding Each Variable

We now explore the categorical variables and how they relate to churn.

4.1 Categorical Variable Counts

df %>%
select(Gender, Education_Level, Marital_Status, Income_Category, Card_Category) %>%
map(~as.data.frame(table(.)))

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## $Gender
## . Freq
## 1 F 5358
## 2 M 4769
##
## $Education_Level
## . Freq
## 1 College 1013
## 2 Doctorate 451
## 3 Graduate 3128
## 4 High School 2013
## 5 Post-Graduate 516
## 6 Uneducated 1487
## 7 Unknown 1519
##
## $Marital_Status
## . Freq
## 1 Divorced 748
## 2 Married 4687
## 3 Single 3943
## 4 Unknown 749
##
## $Income_Category
## . Freq
## 1 $120K + 727
## 2 $40K - $60K 1790
## 3 $60K - $80K 1402
## 4 $80K - $120K 1535
## 5 Less than $40K 3561
## 6 Unknown 1112
##
## $Card_Category
## . Freq
## 1 Blue 9436
## 2 Gold 116
## 3 Platinum 20
## 4 Silver 555

These tables reveal useful patterns:

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Gender is fairly balanced, with slightly more female customers (53%).

Education_Level shows most users are “Graduate” or “High School” educated;
15% are “Unknown.”
Marital_Status is dominated by “Married” and “Single,” while “Divorced” and
“Unknown” are minor.
Income_Category shows a skew toward “Less than $40K”; 11% have “Unknown”
income.
Card_Category is extremely imbalanced — 93% of customers hold “Blue” cards;
other types are rare but may indicate VIP customers.

4.2 Churn Rate by Category (Subplots)

We now visualize how churn is distributed across each category. This reveals if any level (e.g. “Uneducated”,
“Single”) has a higher churn rate.

df %>%
select(Gender, Education_Level, Marital_Status, Income_Category, Card_Category, Churn) %>%
pivot_longer(-Churn, names_to = "variable", values_to = "category") %>%
group_by(variable, category) %>%
summarise(
churn_rate = mean(Churn),
count = n(),
.groups = "drop"
) %>%
ggplot(aes(x = reorder(category, -churn_rate), y = churn_rate)) +
geom_col(fill = "steelblue") +
facet_wrap(~variable, scales = "free", ncol = 2) +
coord_flip() +
theme_minimal() +
labs(title = "Churn Rate by Categorical Variables", x = "Category", y = "Churn Rate")

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The churn rate plots reveal several important patterns:

Card_Category: Customers with “Platinum” and “Gold” cards churn more than
those with “Blue” cards, possibly due to higher expectations or unmet premium
service.
Education_Level: Those with lower or “Unknown” education levels show higher
churn, while Doctorate holders churn the least.
Gender: Female customers have a slightly higher churn rate than male
customers.
Income_Category: Lower income groups churn more. “Unknown” income has
surprisingly high churn, possibly indicating risk or disengagement.
Marital_Status: “Single” customers churn the most, followed by “Unknown,”
while “Married” customers are most stable.

4.3 Churn vs Numeric Features (Boxplots)

Let’s explore how numerical variables differ between churned and non-churned customers.

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df %>%
select(
Churn,
Customer_Age,
Months_on_book,
Credit_Limit,
Total_Trans_Amt,
Avg_Utilization_Ratio
) %>%
pivot_longer(-Churn, names_to = "variable", values_to = "value") %>%
ggplot(aes(x = factor(Churn), y = value, fill = factor(Churn))) +
geom_boxplot() +
facet_wrap(~variable, scales = "free", ncol = 2) +
theme_minimal() +
labs(title = "Numeric Variables by Churn", x = "Churn (0 = No, 1 = Yes)", y = "Value") +
scale_fill_manual(values = c("0" = "steelblue", "1" = "tomato"))

>

The numeric variable boxplots reveal key churn-related differences: > > - Avg_Utilization_Ratio: Churned
customers tend to have lower utilization, suggesting less credit engagement before leaving. > - Credit_Limit:
Churners generally have lower credit limits — they may represent lower-tier customers with less institutional
loyalty. > - Customer_Age: Churned customers are slightly older on average, possibly indicating a late decision to
cut services. > - Months_on_book: Churners have shorter relationships with the bank, reinforcing the idea that
newer customers churn faster. > - Total_Trans_Amt: This shows the strongest signal — churners spend far
less than loyal customers, making it a highly predictive variable.

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4.4 Correlation Between Numeric Variables

This shows how features relate to each other — important for PCA or feature selection later.

library(ggcorrplot)

cor_matrix <- df %>%

select(where(is.numeric)) %>%
select(-Churn) %>%
cor(method = "pearson")

ggcorrplot(cor_matrix,
type = "lower", # Show lower triangle only
method = "square", # Use filled color squares
lab = TRUE, # Show correlation values
lab_size = 2.5, # Smaller label font
tl.cex = 10, # Axis text size
title = "Clean Correlation Heatmap",
colors = c("tomato", "gray", "steelblue"),
ggtheme = theme_minimal())

>

Correlation Insights: > > - Total_Trans_Ct and Total_Trans_Amt show the strongest positive correlation (0.81),
which makes sense — more transactions usually mean higher total amounts. > - Credit_Limit is strongly
correlated (0.95) with Avg_Open_To_Buy, which is expected since open credit is derived from total limit minus
usage. > - Avg_Utilization_Ratio is negatively correlated with Avg_Open_To_Buy (-0.54), meaning high

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utilization typically reduces available credit. > - Most other variables are weakly correlated (< 0.4), suggesting
limited multicollinearity across features. > - This supports the idea that dimensionality reduction (PCA) may not
be urgently needed, but could still be tested to simplify modeling.

Summary of Exploratory Data Analysis (EDA)

We explored all features in the dataset to understand their nature, range, and relationship with churn.

Target Variable ( Churn )

The target is binary: 1 = churned, 0 = retained.
The dataset is imbalanced: ~16% of customers have churned.
This class imbalance will be addressed during modeling.

Numeric Variables
Customer_Age: Slightly older customers (median ~46) tend to churn more.
Credit_Limit and Avg_Open_To_Buy: Right-skewed; churners generally have lower limits and less
available credit.
Total_Trans_Amt and Total_Trans_Ct: Strong predictors — churners spend and transact less.
Avg_Utilization_Ratio: Lower for churners, suggesting reduced credit engagement before churn.
Months_on_book: Churners often have shorter tenure with the bank.

No missing values were found, and outliers were reviewed but retained as they reflect genuine customer
behaviors. Correlation analysis showed no severe multicollinearity, with the exception of expected relationships
(e.g., between Credit_Limit and Avg_Open_To_Buy).

Categorical Variables
Gender: Fairly balanced; females show slightly higher churn.
Education_Level: Lower education and “Unknown” levels are linked to higher churn.
Marital_Status: Single and unknown status customers churn more; married customers churn less.
Income_Category: Lower-income groups and “Unknown” have higher churn risk.
Card_Category: “Platinum” and “Gold” cardholders churn more, though “Blue” dominates in frequency
(93%).

All categorical variables are clean with no NAs, though many include “Unknown” levels. These were retained for
analysis, as they may capture meaningful business signals.

Overall, the EDA shows that churn is associated with lower usage, shorter
relationships, and less financial engagement. These patterns will guide both
feature engineering and model selection in the next steps.

5. Data Transformation
5.1 Categorical Encoding
To prepare the dataset for machine learning, we converted all categorical variables into numerical format using
one-hot encoding:

Applied fastDummies::dummy_cols() to create dummy variables

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Dropped the first level of each to avoid multicollinearity

Retained all “Unknown” levels as they may carry predictive value

We’re using fastDummmies library to do this.

library(fastDummies)
df_encoded <- df %>%
fastDummies::dummy_cols(remove_first_dummy = TRUE, remove_selected_columns = TRUE)

names(df_encoded)

## [1] "Customer_Age" "Dependent_count"

## [3] "Months_on_book" "Total_Relationship_Count"
## [5] "Months_Inactive_12_mon" "Contacts_Count_12_mon"
## [7] "Credit_Limit" "Total_Revolving_Bal"
## [9] "Avg_Open_To_Buy" "Total_Amt_Chng_Q4_Q1"
## [11] "Total_Trans_Amt" "Total_Trans_Ct"
## [13] "Total_Ct_Chng_Q4_Q1" "Avg_Utilization_Ratio"
## [15] "Churn" "Gender_M"
## [17] "Education_Level_Doctorate" "Education_Level_Graduate"
## [19] "Education_Level_High School" "Education_Level_Post-Graduate"
## [21] "Education_Level_Uneducated" "Education_Level_Unknown"
## [23] "Marital_Status_Married" "Marital_Status_Single"
## [25] "Marital_Status_Unknown" "Income_Category_$60K - $80K"
## [27] "Income_Category_$80K - $120K" "Income_Category_$120K +"
## [29] "Income_Category_Less than $40K" "Income_Category_Unknown"
## [31] "Card_Category_Gold" "Card_Category_Platinum"
## [33] "Card_Category_Silver"

5.2 Feature Scaling

Scaling was applied only to numeric features relevant for distance-based models (e.g., KNN, clustering) and PCA:

# List only continuous numeric features (excluding binary/dummy and target)

continuous_vars <- c(
"Customer_Age", "Dependent_count", "Months_on_book",
"Total_Relationship_Count", "Months_Inactive_12_mon", "Contacts_Count_12_mon",
"Credit_Limit", "Total_Revolving_Bal", "Avg_Open_To_Buy",
"Total_Amt_Chng_Q4_Q1", "Total_Trans_Amt", "Total_Trans_Ct",
"Total_Ct_Chng_Q4_Q1", "Avg_Utilization_Ratio"
)

# Scale only those

df_encoded[continuous_vars] <- scale(df_encoded[continuous_vars])

df_encoded %>%
select(all_of(continuous_vars)) %>%
summary()

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## Customer_Age Dependent_count Months_on_book

## Min. :-2.53542 Min. :-1.8063 Min. :-2.870926
## 1st Qu.:-0.66435 1st Qu.:-1.0364 1st Qu.:-0.617099
## Median :-0.04066 Median :-0.2665 Median : 0.008964
## Mean : 0.00000 Mean : 0.0000 Mean : 0.000000
## 3rd Qu.: 0.70777 3rd Qu.: 0.5033 3rd Qu.: 0.509814
## Max. : 3.32726 Max. : 2.0431 Max. : 2.513216
## Total_Relationship_Count Months_Inactive_12_mon Contacts_Count_12_mon
## Min. :-1.8094 Min. :-2.3166 Min. :-2.2195
## 1st Qu.:-0.5228 1st Qu.:-0.3376 1st Qu.:-0.4116
## Median : 0.1206 Median :-0.3376 Median :-0.4116
## Mean : 0.0000 Mean : 0.0000 Mean : 0.0000
## 3rd Qu.: 0.7639 3rd Qu.: 0.6519 3rd Qu.: 0.4924
## Max. : 1.4072 Max. : 3.6204 Max. : 3.2043
## Credit_Limit Total_Revolving_Bal Avg_Open_To_Buy Total_Amt_Chng_Q4_Q1
## Min. :-0.7915 Min. :-1.4268 Min. :-0.8213 Min. :-3.4668
## 1st Qu.:-0.6686 1st Qu.:-0.9863 1st Qu.:-0.6759 1st Qu.:-0.5882
## Median :-0.4492 Median : 0.1389 Median :-0.4395 Median :-0.1092
## Mean : 0.0000 Mean : 0.0000 Mean : 0.0000 Mean : 0.0000
## 3rd Qu.: 0.2680 3rd Qu.: 0.7622 3rd Qu.: 0.2629 3rd Qu.: 0.4519
## Max. : 2.8479 Max. : 1.6616 Max. : 2.9752 Max. :12.0300
## Total_Trans_Amt Total_Trans_Ct Total_Ct_Chng_Q4_Q1
## Min. :-1.14629 Min. :-2.33714 Min. :-2.99145
## 1st Qu.:-0.66191 1st Qu.:-0.84604 1st Qu.:-0.54695
## Median :-0.14868 Median : 0.09123 Median :-0.04294
## Mean : 0.00000 Mean : 0.00000 Mean : 0.00000
## 3rd Qu.: 0.09918 3rd Qu.: 0.68767 3rd Qu.: 0.44428
## Max. : 4.14465 Max. : 3.15864 Max. :12.60795
## Avg_Utilization_Ratio
## Min. :-0.9971
## 1st Qu.:-0.9137
## Median :-0.3587
## Mean : 0.0000
## 3rd Qu.: 0.8274
## Max. : 2.6265

After scaling, all continuous features have zero mean and unit variance, as expected.
Most values fall within ±1, but a few like Total_Ct_Chng_Q4_Q1 and
Total_Amt_Chng_Q4_Q1 have extreme max values, suggesting sharp behavioral
changes for some customers. These may be useful for identifying churn-prone
individuals. No issues seen.

6. Feature Engineering & Dimensionality

Reduction

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6.1 New Feature Creation

Based on EDA insights, we created the following new features:

Utilization_Category : Binned version of Avg_Utilization_Ratio (e.g. Low, Medium, High)

Transaction_Intensity : Total_Trans_Ct divided by Months_on_book
Credit_Saturation : Total_Revolving_Bal divided by Credit_Limit

These features enhance the model’s ability to capture behavior patterns.

df_encoded <- df_encoded %>%

mutate(
Utilization_Category = case_when(
Avg_Utilization_Ratio < 0.2 ~ "Low",
Avg_Utilization_Ratio < 0.5 ~ "Medium",
TRUE ~ "High"
),
Transaction_Intensity = Total_Trans_Ct / Months_on_book,
Credit_Saturation = Total_Revolving_Bal / Credit_Limit
) %>%
fastDummies::dummy_cols(select_columns = "Utilization_Category", remove_first_dummy = TRUE, re
move_selected_columns = TRUE)

6.2 Clustering
K-Means clustering was applied to the scaled numeric features, including engineered variables, to explore natural
customer groupings.

Method:
We used the Elbow Method to determine the optimal number of clusters.
The elbow clearly appears at k = 2, indicating two main clusters in the data.
K-Means was then applied with k = 3 to capture more nuanced subgroup patterns.

# Libraries needed
library(cluster)
library(factoextra)

## Welcome! Want to learn more? See two factoextra-related books at https://goo.gl/ve3WBa

# Prepare numeric features only (excluding target)

clustering_vars <- df_encoded %>%
select(Customer_Age:Avg_Utilization_Ratio,
Transaction_Intensity, Credit_Saturation) # include engineered vars

# Determine optimal number of clusters using Elbow Method

fviz_nbclust(clustering_vars, kmeans, method = "wss") +
labs(title = "Elbow Method for Optimal k")

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# Apply K-Means with k = 3

set.seed(123)
kmeans_result <- kmeans(clustering_vars, centers = 3, nstart = 25)

# Add cluster labels to data

df_encoded$Cluster <- as.factor(kmeans_result$cluster)

# Visualize clusters using PCA reduction

fviz_cluster(kmeans_result, data = clustering_vars,
geom = "point", ellipse.type = "norm",
main = "Cluster Plot (PCA Projection)")

## Too few points to calculate an ellipse

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Insights:
The PCA cluster plot shows a dominant overlap between Cluster 2 and Cluster 3, meaning their
behaviors are very similar.
Cluster 1 appears somewhat distinct, possibly representing a higher-risk or low-engagement group.
However, churn labels were spread across all clusters with no clear separation, meaning clustering does
not improve churn classification directly.
As a result, clusters were not included in the final model, but still revealed behavior-based segmentation
valuable for business profiling or targeted retention strategies.

6.3 PCA Assessment

Principal Component Analysis (PCA) was conducted to explore dimensionality reduction possibilities. This is
especially useful for models sensitive to multicollinearity or high feature counts.

pca_input <- df_encoded %>%

select(-Churn) %>%
select(where(is.numeric))

pca_result <- prcomp(pca_input, center = TRUE, scale. = TRUE)

summary(pca_result)

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## Importance of components:
## PC1 PC2 PC3 PC4 PC5 PC6 PC7
## Standard deviation 2.0213 1.5761 1.39823 1.35563 1.28981 1.1789 1.17517
## Proportion of Variance 0.1135 0.0690 0.05431 0.05105 0.04621 0.0386 0.03836
## Cumulative Proportion 0.1135 0.1825 0.23680 0.28785 0.33406 0.3727 0.41102
## PC8 PC9 PC10 PC11 PC12 PC13 PC14
## Standard deviation 1.16294 1.10814 1.09413 1.08527 1.07555 1.06261 1.03794
## Proportion of Variance 0.03757 0.03411 0.03325 0.03272 0.03213 0.03136 0.02993
## Cumulative Proportion 0.44859 0.48270 0.51596 0.54867 0.58081 0.61217 0.64210
## PC15 PC16 PC17 PC18 PC19 PC20 PC21
## Standard deviation 1.02467 1.01451 1.00816 1.00177 0.99606 0.99362 0.99098
## Proportion of Variance 0.02917 0.02859 0.02823 0.02788 0.02756 0.02742 0.02728
## Cumulative Proportion 0.67126 0.69985 0.72808 0.75596 0.78352 0.81094 0.83822
## PC22 PC23 PC24 PC25 PC26 PC27 PC28
## Standard deviation 0.97838 0.94985 0.9354 0.78938 0.76638 0.69254 0.5911
## Proportion of Variance 0.02659 0.02506 0.0243 0.01731 0.01632 0.01332 0.0097
## Cumulative Proportion 0.86481 0.88987 0.9142 0.93149 0.94780 0.96112 0.9708
## PC29 PC30 PC31 PC32 PC33 PC34 PC35
## Standard deviation 0.47349 0.45842 0.41050 0.38823 0.35393 0.34826 0.22361
## Proportion of Variance 0.00623 0.00584 0.00468 0.00419 0.00348 0.00337 0.00139
## Cumulative Proportion 0.97706 0.98289 0.98758 0.99176 0.99524 0.99861 1.00000
## PC36
## Standard deviation 2.578e-15
## Proportion of Variance 0.000e+00
## Cumulative Proportion 1.000e+00

Results: - The first 10 components explain ~52% of the variance, while the first
20 explain over 86%. - This shows that dimensionality can be reduced from 36 to
~20 features with minimal information loss. - However, PCA components lack
interpretability.

Thus, PCA will be retained for optional use in models sensitive to dimensionality
(like Logistic Regression), but not used in tree-based models like Random Forest,
which handle multicollinearity internally.

7. Modeling
7.1 Model Selection
Two models were selected for their strengths, informed by earlier PCA and clustering steps:

1. Logistic Regression (PCA-enhanced) Used top principal components to reduce dimensionality, eliminate
multicollinearity, and improve interpretability.

2. Random Forest Chosen for its ability to handle complex interactions and work well on full feature sets,
including clustering-related patterns.

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7.2 Model Training

To compare multiple modeling approaches, we trained four models: Logistic Regression (with PCA), Random
Forest, Decision Tree, and K-Nearest Neighbors. All preprocessing (encoding, scaling, feature engineering) was
completed before splitting the data.

set.seed(123)
library(caret)

## Loading required package: lattice

##
## Attaching package: 'caret'

## The following object is masked from 'package:purrr':

##
## lift

library(randomForest)

## randomForest 4.7-1.2

## Type rfNews() to see new features/changes/bug fixes.

##
## Attaching package: 'randomForest'

## The following object is masked from 'package:dplyr':

##
## combine

## The following object is masked from 'package:ggplot2':

##
## margin

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library(rpart)
library(class)

# Split dataset (after full preprocessing)

split <- createDataPartition(df_encoded$Churn, p = 0.8, list = FALSE)
train_data <- df_encoded[split, ]
test_data <- df_encoded[-split, ]

# Prepare PCA-transformed data (for Logistic Regression)

pca_input <- predict(pca_result,
newdata = df_encoded[, setdiff(names(df_encoded),
"Churn")])[, 1:15]
pca_train <- as.data.frame(pca_input[split, ])
pca_test <- as.data.frame(pca_input[-split, ])
pca_train$Churn <- train_data$Churn
pca_test$Churn <- test_data$Churn

i. Logistic Regression (using PCA)

log_model <- glm(Churn ~ .,
data = pca_train,
family = "binomial")

ii. Random Forest (using all features)

rf_model <- randomForest(
x = train_data[, setdiff(names(train_data), "Churn")],
y = as.factor(train_data$Churn),
ntree = 100
)

iii. Decision Tree

dt_model <- rpart(as.factor(Churn) ~ .,
data = train_data,
method = "class")

iv. K-Nearest Neighbors (k = 5)

# KNN requires matrices and factor target
knn_train <- train_data[, setdiff(names(train_data), "Churn")]
knn_test <- test_data[, setdiff(names(test_data), "Churn")]
knn_train_labels <- as.factor(train_data$Churn)
knn_test_labels <- as.factor(test_data$Churn)

knn_preds <- knn(train = knn_train, test = knn_test, cl = knn_train_labels, k = 5)

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7.3 Model Evaluation

We now evaluate the performance of all four models — Logistic Regression, Random Forest, Decision Tree, and
K-Nearest Neighbors — using confusion matrices and classification metrics.

# 1. Logistic Regression (PCA-based)

log_preds <- predict(log_model, newdata = pca_test, type = "response")
log_class <- ifelse(log_preds > 0.5, 1, 0)
log_cm <- confusionMatrix(
data = as.factor(log_class),
reference = as.factor(pca_test$Churn),
positive = "1"
)

# 2. Random Forest
rf_preds <- predict(rf_model, newdata = test_data)
rf_cm <- confusionMatrix(
data = rf_preds,
reference = as.factor(test_data$Churn),
positive = "1"
)

# 3. Decision Tree
dt_preds <- predict(dt_model, newdata = test_data, type = "class")
dt_cm <- confusionMatrix(
data = dt_preds,
reference = as.factor(test_data$Churn),
positive = "1"
)

# 4. K-Nearest Neighbors
knn_cm <- confusionMatrix(
data = knn_preds,
reference = knn_test_labels,
positive = "1"
)

# View all results

print("Logistic Regression Results")

## [1] "Logistic Regression Results"

print(log_cm)

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## Confusion Matrix and Statistics

##
## Reference
## Prediction 0 1
## 0 1658 199
## 1 49 119
##
## Accuracy : 0.8775
## 95% CI : (0.8625, 0.8915)
## No Information Rate : 0.843
## P-Value [Acc > NIR] : 6.002e-06
##
## Kappa : 0.4276
##
## Mcnemar's Test P-Value : < 2.2e-16
##
## Sensitivity : 0.37421
## Specificity : 0.97129
## Pos Pred Value : 0.70833
## Neg Pred Value : 0.89284
## Prevalence : 0.15704
## Detection Rate : 0.05877
## Detection Prevalence : 0.08296
## Balanced Accuracy : 0.67275
##
## 'Positive' Class : 1
##

print("Random Forest Results")

## [1] "Random Forest Results"

print(rf_cm)

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## Confusion Matrix and Statistics

##
## Reference
## Prediction 0 1
## 0 1678 76
## 1 29 242
##
## Accuracy : 0.9481
## 95% CI : (0.9376, 0.9574)
## No Information Rate : 0.843
## P-Value [Acc > NIR] : < 2.2e-16
##
## Kappa : 0.7916
##
## Mcnemar's Test P-Value : 7.151e-06
##
## Sensitivity : 0.7610
## Specificity : 0.9830
## Pos Pred Value : 0.8930
## Neg Pred Value : 0.9567
## Prevalence : 0.1570
## Detection Rate : 0.1195
## Detection Prevalence : 0.1338
## Balanced Accuracy : 0.8720
##
## 'Positive' Class : 1
##

print("Decision Tree Results")

## [1] "Decision Tree Results"

print(dt_cm)

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## Confusion Matrix and Statistics

##
## Reference
## Prediction 0 1
## 0 1637 75
## 1 70 243
##
## Accuracy : 0.9284
## 95% CI : (0.9163, 0.9392)
## No Information Rate : 0.843
## P-Value [Acc > NIR] : <2e-16
##
## Kappa : 0.7278
##
## Mcnemar's Test P-Value : 0.7398
##
## Sensitivity : 0.7642
## Specificity : 0.9590
## Pos Pred Value : 0.7764
## Neg Pred Value : 0.9562
## Prevalence : 0.1570
## Detection Rate : 0.1200
## Detection Prevalence : 0.1546
## Balanced Accuracy : 0.8616
##
## 'Positive' Class : 1
##

print("k-NN Results")

## [1] "k-NN Results"

print(knn_cm)

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## Confusion Matrix and Statistics

##
## Reference
## Prediction 0 1
## 0 1646 164
## 1 61 154
##
## Accuracy : 0.8889
## 95% CI : (0.8744, 0.9023)
## No Information Rate : 0.843
## P-Value [Acc > NIR] : 1.815e-09
##
## Kappa : 0.5166
##
## Mcnemar's Test P-Value : 1.046e-11
##
## Sensitivity : 0.48428
## Specificity : 0.96426
## Pos Pred Value : 0.71628
## Neg Pred Value : 0.90939
## Prevalence : 0.15704
## Detection Rate : 0.07605
## Detection Prevalence : 0.10617
## Balanced Accuracy : 0.72427
##
## 'Positive' Class : 1
##

Model Performance Discussion

Below is a comparison of key metrics across the four models evaluated:

Random
Metric Logistic Regression Forest Decision Tree K-Nearest Neighbors

Accuracy 87.75% 94.81% 92.84% 88.89%

Sensitivity 37.42% 76.10% 76.42% 48.43%

Specificity 97.13% 98.30% 95.90% 96.43%

Balanced Acc. 67.28% 87.20% 86.16% 72.43%

Kappa 0.43 0.79 0.73 0.52

F1-like Insight Moderate Strong Strong Moderate

Insights:
Random Forest clearly outperformed the other models across almost all metrics. It achieved the highest
accuracy (94.8%), sensitivity (76%), and kappa score (0.79), indicating strong predictive power and
consistency.

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Decision Tree performed very closely to Random Forest, especially in sensitivity (76.4%) and balanced
accuracy (86.2%), but was slightly less stable (lower kappa).

Logistic Regression, although interpretable and quick, struggled with low sensitivity (37.4%). It missed a
large number of churners — which is risky in a churn prediction context.

k-NN, while better than logistic regression in sensitivity (48.4%), also lagged behind ensemble-based
models. It was more prone to false negatives and was sensitive to scaling and feature noise.

Conclusion on Model performance:

Random Forest is the best model for production deployment due to its superior balance between identifying
churners (sensitivity) and avoiding false positives (specificity).

Logistic Regression with PCA, though fast, is not suitable alone due to high false negatives.

PCA helped reduce dimensionality for logistic regression but did not close the performance gap compared
to tree-based models.

7.4 Model Tuning

library(caret)
library(glmnet)
library(randomForest)
library(rpart)
library(class)

set.seed(123)
ctrl <- trainControl(method = "cv", number = 5)

# --- Random Forest Tuning ---

rf_grid <- expand.grid(mtry = c(2, 4, 6, 8, 10))
rf_tuned <- train(
x = train_data[, setdiff(names(train_data), "Churn")],
y = as.factor(train_data$Churn),
method = "rf",
metric = "Accuracy",
trControl = ctrl,
tuneGrid = rf_grid,
ntree = 200
)

# --- Logistic Regression with L1 Regularization ---

x_pca <- as.matrix(pca_train[, setdiff(names(pca_train), "Churn")])
y_pca <- as.factor(pca_train$Churn)

log_l1 <- cv.glmnet(x_pca, y_pca, family = "binomial", alpha = 1, type.measure = "class")

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# --- Decision Tree Tuning ---

dt_grid <- expand.grid(cp = seq(0.001, 0.05, by = 0.005))
dt_tuned <- train(
x = train_data[, setdiff(names(train_data), "Churn")],
y = as.factor(train_data$Churn),
method = "rpart",
metric = "Accuracy",
trControl = ctrl,
tuneGrid = dt_grid
)

# --- K-Nearest Neighbors Tuning ---

knn_grid <- expand.grid(k = seq(3, 15, 2))
knn_tuned <- train(
x = train_data[, setdiff(names(train_data), "Churn")],
y = as.factor(train_data$Churn),
method = "knn",
metric = "Accuracy",
trControl = ctrl,
tuneGrid = knn_grid
)

best tuning results

# Random Forest best parameters and accuracy

cat("Random Forest Best mtry:\n")

## Random Forest Best mtry:

print(rf_tuned$bestTune)

## mtry
## 5 10

cat("Random Forest Accuracy:\n")

## Random Forest Accuracy:

print(max(rf_tuned$results$Accuracy))

## [1] 0.9643301

# Logistic Regression with L1 (Lambda)

cat("\nLogistic Regression (L1) Best Lambda:\n")

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##
## Logistic Regression (L1) Best Lambda:

print(log_l1$lambda.min)

## [1] 0.001112295

cat("Logistic Regression Cross-Validated Accuracy:\n")

## Logistic Regression Cross-Validated Accuracy:

log_pred <- predict(log_l1, newx = as.matrix(pca_test[, setdiff(names(pca_test), "Churn")]), s =

"lambda.min", type = "class")
log_acc <- mean(log_pred == as.factor(pca_test$Churn))
print(log_acc)

## [1] 0.8780247

# Decision Tree best parameters and accuracy

cat("\nDecision Tree Best cp:\n")

##
## Decision Tree Best cp:

print(dt_tuned$bestTune)

## cp
## 1 0.001

cat("Decision Tree Accuracy:\n")

## Decision Tree Accuracy:

print(max(dt_tuned$results$Accuracy))

## [1] 0.9432259

# KNN best parameters and accuracy

cat("\nKNN Best k:\n")

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##
## KNN Best k:

print(knn_tuned$bestTune)

## k
## 1 3

cat("KNN Accuracy:\n")

## KNN Accuracy:

print(max(knn_tuned$results$Accuracy))

## [1] 0.8864454

Model Tuning – Discussion

After applying hyperparameter tuning to each model, we observed the following results:

Model Best Parameter(s) Accuracy

Random Forest mtry = 10 0.9643

Logistic Regression (L1, PCA) lambda = 0.0011 0.8780

Decision Tree cp = 0.001 0.9432

K-Nearest Neighbors k=3 0.8864

Insights:
Random Forest achieved the highest accuracy after tuning, confirming its robustness in handling complex,
high-dimensional data.
Decision Tree also performed well after tuning, achieving over 94% accuracy with a small complexity
parameter.
KNN performed reasonably but still underperformed compared to tree-based models.
Logistic Regression (with PCA and L1 penalty) was fast and interpretable but had the lowest accuracy.
Still, its performance is acceptable for baseline modeling.

Conclusion:
Random Forest remains the top choice for production deployment based on accuracy (96.43%). However,
Decision Tree may be favored in scenarios where simpler model interpretability is needed. PCA helped in
simplifying data for logistic regression, but with limited performance gains.

Model Accuracy (Initial) Accuracy (Tuned) Best Parameter(s)

Logistic Regression 87.75% 87.80% lambda = 0.0011 (L1, PCA)

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Model Accuracy (Initial) Accuracy (Tuned) Best Parameter(s)

Random Forest 94.81% 96.43% mtry = 10

Decision Tree 92.84% 94.32% cp = 0.001

K-Nearest Neighbors 88.89% 88.64% k=3

The table compares the performance of four models before and after hyperparameter tuning. Random Forest
showed the highest improvement, reaching an impressive 96.43% accuracy with mtry = 10 . While Logistic
Regression saw minimal gain, all models benefited from tuning, especially Decision Tree which rose from 92.84%
to 94.32%.

8. Conclusion and Recommendations

8.1 Key Business Insights
Customers with low transaction counts, short relationship durations, and low credit limits exhibit
higher churn risk.
Features such as Card Category, Education Level, and Income Bracket emerged as strong predictors.
The presence of “Unknown” values in income and education may point to data quality issues or privacy-
sensitive segments, which also showed significant churn tendencies.

8.2 Recommended Actions for the Bank

Proactively flag and monitor customers with low transaction intensity or engagement.
Upsell or incentivize loyal customers on basic cards (e.g., offer increased credit limits or rewards).
Investigate “Unknown” groups to understand churn triggers—this may include reaching out directly or
improving data collection.

8.3 Limitations of This Study

No time-series behavior was available, limiting the ability to capture trends over time.
All models rely on the assumption of feature relevance, which may shift over time or with external events.

8.4 Future Work Suggestions

Incorporate temporal features (e.g., monthly transaction logs, service interactions).
Explore ensemble techniques like XGBoost or LightGBM to improve predictive power.
Deploy the final model as part of a real-time churn alert system, integrated with CRM or banking systems.
Include explainable AI tools (e.g., SHAP or LIME) for model interpretability in stakeholder reporting.

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