Submitted by Market Crumbs,
FICO introduced the FICO Score in 1989. The FICO score has since become the de facto measure for measuring an individual’s creditworthiness, with 90% of top lenders using it to make billions of credit-related decisions each year.
Once the coronavirus hit the U.S., the Consumer Financial Protection Bureau (CFPB) noticed an alarming uptick in the number of complaints by consumers. The CFPB saw a noticeable jump in the number of complaints relating to mortgages and credit cards mentioning the keyword “coronavirus.”
“In March and April 2020, the Bureau’s Office of Consumer Response received approximately 36,700 and 42,500 complaints, respectively – the highest monthly complaint volumes in the Bureau’s history,” the CFPB said.
This may not seem like much of a big deal, but can be interpreted as a leading indicator signaling credit scores could be deteriorating.
As a result, FICO introduced a new credit measure yesterday—the FICO Resilience Index, which will complement the FICO Score and “helps lenders, borrowers, and investors make more informed and precise decisions in assessing risk during rapidly changing economic cycles.”
The FICO Resilience Index will take into account similar metrics, such as credit usage, payment history, number of accounts, credit history and current balances, to determine a borrower’s ability to withstand a period of economic disruption. The Index will rank borrowers on a scale of 1-99, with 1-44 being more resilient and 70-99 being very sensitive to shifting economic conditions.
The FICO Resilience Index is a result of research conducted by FICO on more than 70 million consumer credit files from the Great Recession, which found that those with lower FICO Scores paid their credit obligations under double-digit unemployment and low consumer confidence.
Using the new FICO Resilience Index will benefit both lenders and borrowers, by enabling credit to better flow during periods of economic disruption. The tool is designed to provide insight into “latent risk” that is not evident in a strong economy but shows up during downturns.
“It turns out there are tens of millions of consumers that have lower FICO scores, below 700, that do relatively well in a recession,” FICO Scores executive vice president Jim Wehmann said. “For the very first time, we can help lenders and consumers identify those who are going to be more sensitive to the downturn and those that are going to be just fine.”
FICO will initially distribute the FICO Resilience Index scores to lenders that are already using FICO Scores. FICO is also planning to enable consumers to view their FICO Resilience Index score so they can determine how they can improve it.
With various lenders already tightening credit standards amid the coronavirus, hopefully this new measure from FICO will prevent consumers who can weather deteriorating economic conditions from being cut off from borrowing.