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New FICO “Resilience” Credit Score Could Help Borrowers

July 15th, 2020 | Credit

As the U.S. economy reels from record-high unemployment and continued COVID-19 shutdowns, the Fair Isaac Corp. (FICO), a global analytics company and producer of the FICO credit score, released a new credit index recently it hopes will keep mortgage lending and other loans flowing during these unprecedented times.

After reviewing over 70 million consumer credit files from the Great Recession, FICO found that the majority of consumers - including those with lower credit scores - kept up with their financial obligations even during that time of double-digit unemployment and devastating housing market crash.  

In addition to using the traditional credit score, lenders will now be able to check the FICO Resilience Index to determine borrower credit-worthiness. The Resilience Index is a measure of borrowers’ ability to financially weather an economic storm. 

“Lenders and investors need to be able to evaluate and manage portfolios based on rapidly changing conditions, to further safety and soundness in credit as well as support the global economy,” said Sally Taylor, vice president and general manager, FICO Scores. “Consumers benefit when lenders have the tools to identify resilient borrowers, enabling lenders to price their products more competitively and to responsibly provide greater access to credit than they would otherwise be able to do.”

Instead of simply raising minimum credit scores, all lenders – including mortgage lenders - can use the new index to understand which borrowers can still manage debt well even if their credit scores are less-than-perfect. The traditional FICO credit score does not give a complete picture of a consumer’s financial health; it does not include whether a borrower is in mortgage forbearance or other important factors. Many consumers will benefit from having lenders look at more factors than a single number.

The Resilience Index will give more weight to lower account balances and credit utilization and put less emphasis on missed payments. While it does not include data about savings account balances or investments, it can still demonstrate to lenders which borrowers have a cushion of credit to handle serious economic downturns. This can be especially helpful to mortgage borrowers who have had to miss a home loan payment or two while in forbearance.

During the Great Recession, mortgage lenders stopped making loans to everyone except those with the highest credit scores. FICOs research shows that plenty of borrowers with lower scores could have successfully handled home loans during that period if given a change. The new Resilience Index is designed to keep that same problem from happening in today’s coronavirus-crisis environment.

"This innovation addresses an issue witnessed in the previous financial crisis, in that financial institutions have been limited in their ability to calculate how resilient individual consumers are in the presence of an economic downturn,” said Quantilytic principal Tom Parrent.  “Through more precise credit analytics, lenders concerned about increased economic stress can maintain lending to more consumers, while still protecting their portfolio. Broader lending to more resilient borrowers may even soften the impact of a downturn should it occur.”