Consumers are being rejected for all kinds of financial products, from personal and auto loans to credit cards. The Wall Street Journal, using data from Equifax, reports that credit card approvals totaled 483,000 in the week ending May 10, compared to 856,000 in the week ending March 22. Compared to the previous year, weekly card approvals in 2019, “it rarely fell below 1.2 million,” according to The Wall Street Journal.
But as banks are adjusting their loan requirements, a new tool is trying to prevent lenders from cutting off consumer access to credit.
Fair Isaac Corp., the data analysis company behind the FICO credit score, has just launched the FICO Resilience Index, a new scoring model designed to help lenders better assess consumers’ sensitivity to financial stress by observe your ability to survive financially through a recession.
“The FICO Resilience Index, used in conjunction with a FICO Score, allows card issuers to limit access less than they would have, because they can now identify borrowers who are more resilient to the economic downturn.” Sally Taylor, vice president of FICO Scores, tells CNBC Select.
FICO defines resilient borrowers as “consumers who are more likely to pay as agreed in the event of a recession.”
The new scoring model ranks consumer resistance on a scale of 1 to 99. The higher your score, the greater the risk of default on your payments; The lower your score, the more likely you are to make payments on time even when the economy experiences a recession.
The criteria for receiving the FICO Resilience Index is the same as that required to receive a FICO credit rating: your credit profile must show at least one open account that has been reported to a credit agency in the last six months or more.
The FICO Resilience Index measures consumers by many of the same factors as credit scores, including their payment history, outstanding balances, length of credit history, new combination of credit and credit, with a strong focus on borrowers. they maintain a low credit utilization rate (which means a low balance compared to their credit limit). But experts suggest that it may take some time for lenders to actually use the new tool.
CNBC Select next spoke to two credit experts about how the new FICO rating model will affect consumers and why a high credit score is still important.
Consumers can benefit from the FICO Resilience Index, but it will take time
“The impact of COVID-19 has exposed a need for change and innovation in almost every aspect of the financial services sector,” Bruce McClary, spokesman for the National Foundation for Credit Counseling (NFCC), told CNBC Select.
“While traditional credit scores may have been sufficient as an indicator of creditworthiness in recent years, the abruptness and intensity of the economic impact resulting from the coronavirus pandemic have shown that we must look beyond the score to properly assess capacity of consumer financial recovery. “
However, while the need for an innovative credit rating is urgent, lenders will not immediately use this tool to approve new lines of credit.
“Lenders take time to test and implement tools like this,” financial expert John Ulzheimer, formerly of FICO and Equifax, told CNBC Select. “Lenders will have to study and test the effectiveness of the index and how it will impact their decisions and, of course, their results.”
The new tool may require trial and error, but the improved data is useful to reflect on how people function in the current state of the economy. The Resilience Index looks at metrics that show consumers’ ability to pay bills and, if lenders take your resilience score into account when applying for credit, it could increase your chances of approval.
“If used, it can certainly affect the way applicants are treated,” says Ulzheimer. “Some decreases can turn into approvals, and vice versa.”
Consumers most likely to benefit include those with low balances, especially relative to their credit limit. A low rate of credit utilization not only indicates a lower risk of non-payment, but is also indicative of financial resilience. If you can keep balances low without using much of your available credit, this illustrates that you don’t need it as much as someone with a high utilization rate.
“As your borrowing obligations are lower and lower, you will be better positioned to overcome a tough economic downturn,” says Ulzheimer.
How to keep your credit score high
Before you focus on your score on the new FICO Resilience Index, know that a healthy credit score is still important if you want to get approved for new credit.
You could start your credit journey and look to apply for a secured credit card, such as Capital One® Secured, or perhaps you hope to take advantage of cash back on all your grocery purchases with a card like Blue Cash Preferred ® American Express Card. Whatever the case, know that working toward a good credit score, or having one already, will always be helpful.
The most important factor in a good credit score is your payment history. Making your payments on time and in full can help you improve your credit score significantly over the long term. As a general rule, you should pay your credit card bill before the due date, but in some cases (such as when your credit card bill is higher than usual) you may benefit from paying it sooner.
Be sure to pay attention to the amount of credit you use: your credit utilization rate, or debt-to-credit ratio, shows lenders how much of your available credit you use. Experts recommend a ratio of less than 30%, but the smaller the better.
Bottom line
It may take some time before consumers see banks incorporate the FICO Resilience Index into their loan decisions, but when they do, it could be a deciding factor if they end up being approved for something like a new credit card or a increase in credit limit.
In the meantime, maintain a healthy credit score or work to improve yours to ensure the best chance of passing.
The information on Capital One® Secured has been independently collected by CNBC and has not been reviewed or provided by the card issuer prior to publication.
Editorial note: The opinions, analyzes, reviews or recommendations expressed in this article belong exclusively to the editorial staff of CNBC Select and have not been reviewed, approved or endorsed by any third party.
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