Delinquent Payment History? It Won’t Matter As Much For FICO’s New Resiliency Score

There’s a new risk measurement entering the world of credit lending and this one isn’t based on your past payment history. Called the FICO® Resilience Index (FRI), this score aims to predict which consumers are more likely to default on payments during a time of economic stress. It is heavily based on what types of credit a person has and how they use it. Unlike the regular FICO® credit score, for which a higher score out of 850 is a sign of stronger credit, the FRI ranks consumers on a scale of 1-99. A lower score is a sign the consumer has higher resiliency.

As Sally Taylor, Vice President of FICO Scores, explained in the release, the FRI is not intended to replace the regular FICO score. Its goal is to help lenders segment out who is at high risk within certain bands of credit scores. For example, had the FRI been around during the Great Recession data modeling suggests at least 600,000 consumers that were denied mortgages would have been approved using these additional criteria. (You can read more about that analysis in this white paper by Tom Parrent, former chief risk officer for Genworth Financial.)

The factors which influence someone’s FRI are largely based on four main areas:

• The type of credit mix a consumer has. FICO found one of the ‘strongest drivers’ of measuring resilience was consumers who had at least half their credit in installment credit, as opposed to revolving credit. (Car loans would be an example of installment credit; regular credit cards are a type of revolving credit).
• Total revolving balances are much lower. Resilient consumers have balances around $1,000 or less, whereas less resilient consumers typically have balances over $15,000.
• Fewer active accounts. Resilient consumers have about three active accounts; less resilient consumers have about 10.
• Fewer credit inquires. People who have higher resiliency typically averaged less than one credit inquiry in the past year, whereas the other group had between 1.3 and 2.6 inquiries.

Notice how past payment history isn’t a major factor. As one of their representatives explained in their webinar on the methodology, past payment history didn’t seem to be a strong indicator of how likely someone is to default on lines of credit during financial downturns. Of course, it does become a factor indirectly since the likelihood of having active lines of credit is closely tied to how well you make the payments on time.

To determine the criteria for measuring how resilient a consumer’s financial profile is FICO used two data sets—one from two years during the Great Recession (2007-2009) and one from a few years later (2012-2015)—to match up pairs of consumers with nearly identical profiles and see how they performed retroactively. Out of the 2 million consumers in the dataset they were able to come up with 300,000 matched pairs for the analysis. They purposefully left out any mortgage-specific indicators so that the model would be applicable to times of overall financial stress, not just the housing crisis of the Recession.

Lenders have been increasing credit score requirements ever since early spring when the U.S. economy first showed signs of faltering. This may end up being one of the factors that helps prevent the housing market from plummeting if unemployment continues at its high rate. As Taylor summarized, “The desired outcome is for lenders, borrowers, and investors to benefit from a system that is even more precise in assessing risk, and less prone to broad credit restrictions and undifferentiated risk pricing, which can tighten the flow of credit during an economic downturn.