As lenders adjust their rating standards and credit card issuers approve fewer new customers, a new FICO credit scoring tool could help lenders determine if it’s a safe bet in uncertain economic times.
FICO, the developer of the most widely used credit score, introduced a new Resilience Index that measures your financial resilience during a recession that could help, or hurt, your chances of getting approved for a new credit.
The index is based on research from more than 70 million credit files from the Great Recession that examined how consumers managed their financial obligations and responsibilities at an economically challenging time. Lenders could use the index rating in addition to a traditional credit rating to determine who qualifies for a loan or credit card.
Miami Beach, Tropical Beach Cafe credit card scanner. (Photo: Jeffrey Greenberg / Universal Images Group via Getty Images)
“The credit score is designed to predict how likely you are to make a payment or not,” said John Ulzheimer, a credit expert who previously worked at FICO and the Equifax credit bureau. “This resilience index is more about what is the probability that you will overcome the economic recession and continue paying your bills on time.”
The index rates consumers’ resilience on a scale of 1 to 99. Those with a rating between 1 and 44 are considered the most prepared to face economic change. Consumers who rank more resistant tend to have:
More experience in credit management,
Lower total revolving balances,
Fewer active accounts, and
Fewer credit inquiries in the past year.
The index rates consumers’ resilience on a scale of 1 to 99. Those with a rating between 1 and 44 are considered the most prepared to face economic change. Photo: FICO
The index will complement the industry standard FICO score, which uses your payment history as the # 1 factor that determines your score. The Resilience Index, by contrast, focuses on your utilization rate (the percentage of available credit you use) and recent credit history.
“Now lenders can see what their debt was like in the past 24 months,” Ulzheimer said. “Therefore, it is very easy to know if the trajectory of its debt is increasing, if it remains the same or if it is decreasing.”
Lenders will take time to use the new tool, if they adopt it, so that consumers don’t have to worry about this particular index in the coming weeks or months, Ulzheimer said.
“In consumer loans, no tool is implemented immediately,” he said. “It can take many years to get a critical mass of users because it takes a long time to implement a new tool.”
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Having a good Resilience Index rating requires many of the same financial habits as having a good credit rating, according to Ulzheimer, so consumers don’t need to change what they’re doing if they already have excellent credit.
“In addition to paying your bills on time,” he said, “I would commonly tell consumers to only apply for credit when they really need it, to pay full balances every month, keep balances low, maintain fewer accounts with balances and to keep balances low. in relation to your credit limits. “
Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova.“data-reactid =” 71 “>Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova.
