FICO Launches New ‘Resilience Index’
FICO has created a new method of determining a consumer’s ability to weather financial storms. It is called the FICO Resilience Index and it uses credit bureau information from both before and after the Great Recession of 2007 to 2009. It measures a person’s likelihood of paying the bills on time, even during times of financial uncertainty.
This is the type of score that might be helpful for some institutions in the coming years as the country gets passed the coronavirus pandemic and the economic downturn it caused this year.
FICO Resilience Index
The FICO Resilience Index is designed to give lenders and investors a refined tool to help identify those consumers across FICO Scores bands that represent higher resilience during an unexpected economic disruption. For instance, higher-resilience consumers tend to have:
- More experience managing credit.
- Lower total revolving balances.
- Fewer active accounts.
- Fewer credit inquiries in the last year.
The FICO Resilience Index operates on a scale of 1 to 99. Lower scores indicate greater financial resilience in an economic downturn. Consumers with scores in the 1 to 44 range are viewed as the most prepared and able to weather an economic shift. The resulting score is meant to be used in tandem with a consumer’s existing credit report to predict how they would fare during unprecedented times the FICO blog post says.
Lenders often respond to economic uncertainty by raising qualifications required for consumers. The FICO Resilience Index can be used as an additional tool for lenders to identify customers who are more resilient to economic stress. The score uses FICO’s analysis of more than 70 million consumer credit files during the Great Recession.
The FICO® Resilience Index can also help address:
- Better Portfolio Management. Lenders can use the FICO® Resilience Index to better gauge and manage overall portfolio vulnerability, by providing a new way for risk officers, regulators and investors to monitor the quality and resilience of a portfolio throughout economic cycles – and evaluate the effectiveness of actions taken to improve resilience and ultimately reduce losses.
- Regulatory Stress Tests. By actively managing FICO® Resilience Index distributions to build more robust portfolios over a full market cycle, financial institutions can more precisely set capital requirements to comply with the Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act Stress Tests (DFAST).
- Better Loss Allowance Estimations. FICO® Resilience Index helps lenders identify more resilient consumers to optimize capital and reduce loan loss allowance estimates.
- Transparency within Secondary Market. Currently, FICO® Score distributions along with additional data points are used to gauge the overall risk of portfolios. The FICO® Resilience Index adds another layer of data and insight to help indicate resilience of the overall portfolio.