New FICO Resilience Index: What Is It & Why You Should Care

New FICO Resilience Index: What Is It & Why You Should Care | The Loaded Pig

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This new credit scoring model may actually help more consumers get approved for lines of credit. This week the FICO Resilience Index was made available to lenders to complement FICO credit scores. The new credit scoring model is intended to help lenders gauge a consumers’ financial resilience during unexpected economic conditions. It specifically aims to help lenders identify consumers who are “more likely to pay as agreed in the event of a recession,” according to FICO. Find out how the FICO Resilience Index works and how it may enable more consumers to get approved for credit accounts.

How Does It Work

FICO analyzed hundreds of thousands of anonymous, consumer credit profiles from before and after the Great Recession. Patterns emerged affecting payment history and default risk during the Great Recession. These risk profiles are used in the Resilience Index to predict consumers’ likelihood of making payments during a recession.

The FICO Resilience Index is calculated based on the information in credit reports and ranges from 1-99, with lower scores representing more resilient consumers. Here’s a breakdown:

  • 1-44: More Resilient
  • 45-59: Moderate Resilience
  • 60-69: Sensitive To A Recession
  • 70-99: More Sensitive To A Recession

Who Does It Help

Traditionally during a recession or economic downturn, lenders raise their credit standards to approve consumers for new lines of credit. In turn, people with lower credit scores are less likely to get approved. With the new FICO Resilience Index used in conjunction with FICO credit scores, consumers with lower credit scores may be more likely to get approved for credit accounts.

Banks | Lenders | New FICO Resilience Index: What Is It & Why You Should Care | The Loaded Pig

William Lansing, CEO of FICO, confirmed this takeaway in April stating, “The traditional way of dealing with downturns, and we see it today, is that lenders raise their lending thresholds. They raise their cutoffs. And while obviously that’s the prudent thing to do, we’d love for that to be a little more sophisticated and surgical and be able to evaluate some of the individuals below those cutoffs with more precision.”

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What Can You Do To Raise Your FICO Resilience Index

According to FICO, consumers with higher resilience in an economic recession or downturn tend to have a lower credit utilization ratio, fewer active credit accounts and less credit inquiries within the past year as compared to other consumers. While the specific measures for each range of the index are not available, consumers can make an effort to raise their Resilience Index by learning more about these factors.

Perhaps most importantly, consumers should aim to lower their credit utilization ratio. This is the amount of revolving credit you’re using divided by the amount of revolving credit you have available. Revolving credit refers to credit accounts without a fixed number of payments, such as credit cards, retail cards and personal lines of credit. This calculation doesn’t include installment credit accounts, such as mortgages, auto loans and student loans. The rule of thumb is to keep your credit utilization ratio below 30%, however you should try to keep it as low as possible. This means making it a priority to pay off your credit card balance in full each month.

Other ways you can raise your FICO Resilience Index include minimizing the number of active credit accounts and number of credit inquiries on your credit reports. Having many active credit accounts and credit inquiries indicate that you may be less likely to make your payments during a recession.

It will likely take some time for lenders to begin using the FICO resilience index, which gives consumers some time to improve their resilience score as well as their FICO credit score. Learn more about the factors that determine your FICO credit score as well as how to improve your credit score.

Financial freedom begins with good habits.

Rebecca & Tiago, theloadedpig.com