How does the new FICO Resilience Index affect me?
Consumers are being denied all kinds of financial products, from personal and auto loans to credit cards. The Wall Street Journal, using data from Equifax, reports that credit card approvals totaled 483,000 in the week ending May 10, compared to 856,000 in the week ending March 22. Compared to the previous year, weekly card approvals in 2019 “rarely fell below 1.2 million”, according to The Wall Street Journal.
But since the banks are tighten their loan termsa new tool attempts to prevent lenders from cutting off consumers’ access to credit.
Fair Isaac Corp., the data analytics company behind the FICO credit score, has just launched the FICO Resilience Index, a new scoring model designed to help lenders better gauge consumer sensitivity to the financial stress by examining their ability to survive financially despite a downturn. .
“The FICO Resilience Index, used in conjunction with a FICO score, allows card issuers to limit access less than they otherwise would have because they can now identify borrowers who are more resilient to the economic downturn. “, Sally Taylor, Vice President of FICO Scores, says CNBC Select.
FICO defines resilient borrowers as “consumers who are more likely to pay as agreed in the event of a recession”.
The new scoring model ranks consumer resilience on a scale of 1 to 99. The higher your score, the higher the risk of default; the lower your score, the more likely you are to make payments on time even when the economy is down.
The criteria to receive the FICO Resilience Index are the same as those required to receive a FICO credit score: your credit profile must show at least one open account that has been reported to a credit bureau within the last six months or more.
The FICO Resilience Index measures consumers by many of the same factors that credit scores do – including your payment history, outstanding balances, length of credit history, new credit and credit mix – with a focus on borrowers who maintain a low credit utilization rate (i.e. a low balance compared to their credit limit). But experts suggest it may be some time before lenders really use the new tool.
Below, CNBC Select spoke with two credit experts about how the new FICO scoring model will affect consumers and why a high credit score still matters.
“The impact of COVID-19 has revealed a need for change and innovation in nearly every aspect of the financial services industry,” Bruce McClary, spokesperson for the National Foundation for Credit Counseling (NFCC), told CNBC Select.
“While traditional credit ratings may have sufficed as an indicator of creditworthiness in years past, the suddenness and intensity of the economic impact resulting from the coronavirus pandemic has proven that we need to look beyond the rating. to properly assess a consumer’s financial resilience.”
Yet, although the need for innovative credit scoring is urgent, lenders will not immediately use this tool to approve new lines of credit.
“It takes time for lenders to test and implement tools like this,” financial expert John Ulzheimer, formerly of FICO and Equifax, told CNBC Select. “Lenders will need to study and test the effectiveness of the index and its impact on their decisions and, of course, their bottom line.”
The new tool may take some trial and error, but the improved data is useful for reflecting how people are operating in the current state of the economy. The Resilience Index looks at metrics that show consumers’ ability to pay their bills, and if lenders consider your resilience score when applying for credit, it could increase your chances of approval.
“If used, it can definitely impact how applicants are treated,” Ulzheimer says. “Some denials can turn into approvals, and vice versa.”
The consumers most likely to benefit are those with low balances, especially relative to their credit limit. A low credit utilization rate not only indicates a lower risk of delinquency, but it is also indicative of financial resilience. If you can maintain low balances while not using much of your available credit, it shows that you don’t need it as much as someone with high usage.
“The less and less debt you have, the better able you are to weather tough economic times,” Ulzheimer said.
Before you focus on your score on FICO’s new Resilience Index, know that a healthy credit score is still important if you want to get approved for new credit.
You may have just started your credit journey and are looking to apply for secure credit cardas the Capital One Platinum Secured Credit Card or maybe you’re hoping to enjoy cash back on all your grocery shopping with a card like Blue Cash Preferred® Card from American Express. Either way, know that it will always be useful for you to work your way to a good credit score – or to already have one -.
The most important factor in a good credit rating is your payment history. Making your payments on time and in full can help improve your credit score significantly over the long term. Generally, you should pay your credit card bill before the due date, but in some cases (for example, when your credit card bill is higher than usual), you might actually benefit from paying it earlier.
Be sure to pay attention to how much credit you’re using: your credit utilization rate, or debt-to-equity ratio, tells lenders how much available credit you’re using. Experts recommend a ratio below 30%, but the lower the better.
It may take a while for consumers to see banks incorporate FICO’s Resilience Index into their lending decisions, but when they do, it can be a deciding factor in whether or not you end up being approved. for something like a new credit card or a credit limit increase.
In the meantime, maintain a healthy credit score or improve yours to ensure the best chance of approval.
Information about the Capital One Platinum Secured Card was independently collected by CNBC and was not reviewed or provided by the card issuer prior to publication.
Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff alone and have not been reviewed, endorsed or otherwise endorsed by any third party.