FICO has announced the new ‘FICO Resilience Index‘ which is a tool that aims to help lenders assess risk in changing economic times. FICO developed the FICO resilience index based on data from 70 million consumer credit files from the Great Recession, FICO claims that while losses across all FICO scores approximately doubled during this period these losses were concentrated in a small sub set of consumers. This new tool aims to help lenders identify these consumers so they can better manage that risk.
The index gives consumers a score from 1-99, the lower a score the more resilient the model believes that consumer is (a score of 1 to 44 is considered resilient). The following factors are scored positively:
- Keeping credit utilization low
- Avoiding too many accounts
- Having a long credit history
This is similar to a traditional FICO score, but those scores put more weighting on payment history. At the moment this new resilience index is being launched as a pilot and as a consumer it’s unlikely it’s something you need to be too concerned about. FICO frequently releases new models and updates to old models but most financial institutions are slow to adopt these. For example FICO released the FICO 10 model earlier this year but many lenders are still using FICO 8 (FICO 9 was released more than five years ago).
I find this information interesting but I don’t quite understand how it will affect the credit scoring model.
It looks like it will be similar to previous models but with a different scoring range (1-99, with 1 best and 99 worst) and additional weight in these areas:
(1) More experience managing credit
TRANSLATION: Age of Oldest Account and Age of Oldest Revolving Account. Conceivable that they might be looking only at oldest OPEN accounts. Obviously older is better.
(2) Lower total revolving balances
(3) Fewer active accounts
TRANSLATION: We discuss this in the comments below, but the best guess is that a person is penalized for having a lot of open accounts. Note, however, that FICO still loves it when you have 3+ open revolving accounts and an open loan. Thus the new model will likely have 3-5 credit cards and an open loan as a sweet spot.
(4) Fewer credit inquiries in the last year
As DoC observes, it’s likely that few creditors will use this model in the next year or two.
If a person is really eager to maximize his score in the new model, he should:
(1) Keep his oldest credit card open. Take steps to prevent it from being closed due to inactivity. This is smart for all FICO models.
(2) Keep his reported revolving balances low. Smart move for all FICO models. Note that FICO does impose a different penalty when ALL credit cards are at $0, so having exactly one card with a low positive balance and all others at zero is a guaranteed sweet spot for all FICO models, in the couple months before you need your score to be at its highest.
(3) Close open accounts that you don’t use. This appears to be helpful for this new model but not for other FICO models. One should sharply avoid closing your oldest credit cards. The strategy here would be to look through your reports and see if you have a ton of open CCs; and then explore closing many of the younger ones if you can.
(4) Make few credit applications in any rolling 12-month period. Looks like this model looks at this more heavily than previous FICO models did. FICO might in the model look more heavily at the scoring factor :Age of Youngest Account”
This is in addition to the usual smart scoring behavior of avoiding EVER being reported as late on any account. Note that some FICO models penalize you for having CFAs (Consumer Finance Accounts). These are not traditional credit cards but are rather the sort o deal that you see when you are thinking about buying a bed, a washing machine, a big screen TV, etc: Buy this now and pay nothing for the first ___ months! I advise people to avoid anything that looks like a CFA.
Live within your means…. and only use credit when necessary…. simple rules that no “scoring” system can tarnish.
Wow, a new scoring model for assessing risk. That’s a euphemism for “let’s find another way to f*** with the American consumer.” Look, I believe it’s very important for industries to assess risk but it’s quite disingenuous to do so when people truly are, often due to forces beyond their control, struggling financially due to the impact of the power of a virus on an economy. And, by the way, stop calling credit reporting companies “bureaus.” They are credit reporting “companies.” The word bureaus give them this silly image of being some kind of government protection and caring powerhouse. The phrase I’d prefer to use is “multi-billion dollar data pimps.” And FICO is the granddaddy of them all.
Some of the commenters here are suggesting that this model was created by FICO in response to the COVID pandemic. That is in my view improbable. For one thing, FICO usually takes a few years to build their models. For another, the folks over at the myFICO Forums began seeing this score in late March.
What I have no problem believing is that FICO is now *marketing* this to lenders based on lender fear of consumer risk in the world of COVID.
The model itself, however, was almost certainly designed in 2018-2019 and then finalized in Jan/Feb of this year (or possibly end of 2019). They say that they designed it using the data of the Great Recession, which was back in 2008-2010.
This model was being discussed well before anyone had ever heard of the COVID-19 coronavirus.
The folks over at the myFICO forums have a crazy long discussion of this which started back in March. If somebody wants to go through the whole thing they might find stuff worth reporting to people here at DoC.
https://ficoforums.myfico.com/t5/General-Credit-Topics/FICO-Score-Stress-Indicators-Indexes/td-p/5962374
The link https://www.fico.com/blogs/fico-resilience-index-now-available-lenders-pilot says “…higher-resilience consumers tend to have…Fewer active accounts…”
So maybe it’s okay to have lots of accounts, as long as only a small number of them have non-zero balances reporting.
In any case, I will continue to take full advantage of any 0% APRs.
Hi SamL. That’s going to be the money question for the people here at DoC. The phrase “active account” is a terrible choice. If FICO means “open account” (contrasting it with closed accounts) they should say “open account.” If they instead mean “accounts with a balance” they should say that. FICO has no trouble using those two phrases when they are describing their traditional models — it’s irritating for them to use this ambiguous phrase here.
I agree it’s highly ambiguous (and I chose one interpretation, which I can’t be confident of). They are intentionally vague with their proprietary methods.
Though here https://www.myfico.com/credit-education/credit-scores/amount-of-debt there is one factor
“How many accounts have balances”, though I don’t know if that’s absolute number, or percentage of open accounts.
Yup, how many accounts have balances has absolutely been a scoring factor in FICO models for a long time. And FICO has actually been very transparent about that, though not the exact details of how each model implements that. As you observe, they don’t say whether a given model uses a pure ratio implementation (% of accounts with a balance) or the integer number or perhaps both.
My point, however, is that FICO has had no problem in the past in using the phrases “accounts with a balance” and “open accounts.”. The two things mean very different things and generally FICO does a good job in their model descriptions at using one or the other. My guess is that whoever wrote that press release just did a bad job.
My thoughts too: “My guess is that whoever wrote that press release just did a bad job.”
Anyway, I’m going to use my cards how I want.
Seems to negatively impact churners, putting them in the category of those who open a bunch of accounts and then default on payments.
Anyone know if this will also be a consumer-facing index?
Hey Mark. Are you asking whether consumers will be able to get this score? If so, my guess is that the answer is yes (eventually) though I imagine consumers will have to pay for it. At one time there was a FICO policy of not permitting consumers to see their scores, but that was many years ago. At myFICO.com (for example) you can buy a big bag that contains almost every score out there. Personally I almost never buy anything from them since there are so many free tools for getting FICO scores, but my point is that if you feel like paying for them I don’t believe there’s much limit as to what you can get.
“Avoiding too many accounts” – Hope that number is about 50
This is specifically done because congress demanded credit bureaus not use mortgage forbearance in calculating credit score so as to avoid people with covid hardships from having problems obtaining credit. Of course that was blow to the free market where lenders want to see this data to make more informed decisions on lending.
Congress wants money printer to keep going brrrrrrr and lending to expand. If 10% of the country’s FICO drops, then lending slows. A contraction in lending leads to a much needed economic contraction to avoid this bubble from getting bigger but congress wants to be re-elected so they want to kick the bubble popping down the road.
So credit bureaus Used their ingenuity to creat a new non-credit score “credit scores’ that isn’t a “credit score” but includes mortgage forbearance. This is a loophole around the congressional mandate.
In other words, if you’re receiving forbearance this hurts you and if you aren’t then this helps you.