By: First Union | Date:
FICO And the New Score that Measures Financial Resilience
While the crisis of the first part of this year certainly proved to be challenging for most Americans leading to unprecedented unemployment numbers, business closures, and an economic recession, many in the US had trouble qualifying for loans and credit cards even prior. The number of people who struggled in this respect was just over 60 million.
As we try and march on from the past few months, experts agree that things are only going to get worse for many Americans. Almost forty percent of US banks are suggesting that their standards are going to get tighter and tighter in the months and perhaps years to come. This is precisely why Fair Isaac Corp. (the company behind FICO scores/) has launched the FICO Resilience Index.
This new index, quite similar to what a FICO score already includes, will look at things such as payment history, accounts open and amount of debt owed. The difference however comes in the fact that this new index will also take into account the economic picture and a borrower's consequent ability to weather such a downturn. They are rating individuals on a scale of 1 to 99 (the lower the number, the better/).
Seemingly, it's been found that even those people with scores below 700, do fare well in a recession. The number of such people falls in the tens of millions. It is about identifying those that can manage the downturn, and those who will otherwise be heavily impacted.
The Resilience Index again relies upon very similar factors to a traditional FICO score. However, delinquency is not counted as heavily in this Resilience Index. In a more typical scenario when you miss a payment, your credit takes a pretty big hit. In this scenario though, delinquency is given less priority than other factors more relevant to surviving a recession. You can be delinquent and still be resilient overall if, for instance, you have low utilization of credit and relatively low balances across the board.
A credit score will continue to be important in terms of letting lenders know whether or not a borrower is a safe bet, but given the events of 2020, taking into account what is going on with the overall economic picture is becoming increasingly important as well. As the Resilience Index weighs both together, a more accurate picture is thereby painted, giving lenders greater insights into a borrower's potential.
What this will theoretically do is to help those whose scores may be a bit lower than required still gain access to much-needed loans and credit at this trying time. It levels the playing field in a manner of speaking—and at this juncture, so many Americans need that level field!
First Union Lending has been working with small businesses throughout the crisis. We want to see our clients make it through this and come out strong. If you need additional cash to weather the storm, we can help. Call today!