FICO Just Launched a New Score to Make Borrowing Money Easier for People With Low Credit Scores
Introducing the FICO Resilience Index.
When borrowing money, your credit score is king. Paired with your credit reports, your credit score gives lenders a sense of your history as a money borrower and allows them to predict whether you’re likely to repay the money they lend you, with interest. High credit scores can help borrowers get more favorable interest rates; low credit scores can lead to less favorable rates or even declined loan applications.
Fortunately, there are ways you can raise your credit score, given a little time. (You can also lower your score by missing payments or doing a number of other things that make you seem like a risky borrower.) Unfortunately, your credit score doesn’t always reveal the whole truth about you as a borrower. Some people may have a middling credit score but be very well positioned to ride out an economic crisis, like the one we’re in now, with minimal financial damage.
FICO, or the Fair Isaac Corporation, which determines FICO credit scores and is the most widely used credit score determiner in the country, has taken measures to make borrowing money a little easier during these uncertain times. FICO has updated how it calculates credit scores from time to time, with varying impact on people’s credit scores, but this time, FICO has introduced a whole new score: The FICO Resilience Index.
This new analytic tool is designed to accompany FICO Scores to help identify those people “that represent higher resilience,” according to the FICO blog post announcing the launch. Right now, those are people who seem likely to get through this economic downturn with minimal negative impacts on their finances; they’re likely to continue to manage their finances responsibly, even with the current unemployment rate and other features of a challenging economic climate.
These people may not have high credit scores and be cut off from borrowing money as lenders become more cautious, but the FICO Resilience Index seeks to prevent that by helping lenders identify the borrowers with potentially lower credit scores who are still likely to repay any loans in full. On a broader scale, this keeps credit flowing during the crisis, but on a personal level, it makes it easier for resilient individuals to borrow money if needed.
“The FICO Resilience Index switches up the normal FICO formula a bit,” says Ted Rossman, industry analyst at CreditCards.com, in emailed comments. “Whereas paying bills on time is usually the number-one factor, the Resilience Index focuses more on keeping your credit utilization low, avoiding too many accounts, and maintaining a long credit history. These aren’t drastic changes, but they will be used as tiebreakers of sorts. They could tip the scales if you’re on the border of getting approved or not.”
The Resilience Index gives consumers a score on a scale of one to 99, with one being the most resilient and 99 being the least. A higher number indicates that a borrower is more sensitive to shifting economic conditions. According to the blog post, higher-resilience consumers may have more experience managing credit, lower total revolving balances, fewer active accounts, and fewer credit inquiries in the last year. Even if those people have a middle to low credit score, their index rating may show that they’re resilient and still a safe pick for lenders. People with resilience scores between 1 and 44 are viewed as the most prepared and able to weather an economic shift, the blog post says.
There’s never a guarantee that you’ll be approved for a loan, regardless of your credit score, but the FICO Resilience Index is a new way for lenders to assess borrowers—and could help people with lower credit scores but stable finances access loans during these challenging economic times.
The FICO Resilience scoring system was just announced, so it may be some time before it’s widely used, but it offers some hope to responsible borrowers who don’t have perfect credit scores. Eventually, CNBC reports, FICO will offer a method for consumers to check their Resilience scores and even improve them; until then, try to preserve your current credit score as much as possible.
To do so, Rossman says consumers should focus on lowering their credit utilization—the proportion of their spending limit, as on a credit card, that they spend each month. Most experts recommend using no more than 30 percent of your credit each month; more than that, and your credit utilization could be too high. If you can’t reduce your spending right now, try to make an extra payment on your credit card in the middle of the month to reduce the statement balance, thus making your credit utilization look lower.