You know about your FICO score. But soon, when you apply for credit, you may also be evaluated on how you can handle economic stress.
1. What is the FICO Resilience Index?
Your normal FICO score assesses your creditworthiness based on your history of managing debt. The new FICO Resilience Index will be used by creditors to determine how likely you are to continue paying your bills during an economic crisis, like COVID-19, for example. The FICO Resilience Index is making a timely debut. Reports indicate that credit card, personal loans, and auto loans approval rates fell since the beginning of the coronavirus pandemic.
2. What Does It Look Like?
The FICO Resilience Index breaks down into four ranges of numbers:
- 1-44 indicates you are more resilient to economic disruptions
- 45-59 indicates you are moderately resilient
- 60-69 suggests you are sensitive to changes in the economy
- 70-99 indicates you are very sensitive to disruptions in the economy
If your FICO Resilience Index is 12, for example, this would suggest that you are likely to continue to pay your bills on time, no matter what is going on with the economy.
You can improve your chances of scoring in the lower bracket by:
- Reducing your revolving credit. FICO discovered that consumers who have at least 50% of their credit in the form of installment credit (such as car loan, personal loans) rather than revolving credit (credit cards) are more resilient to economic fluctuations
- Maintaining a low credit utilization ratio
- Minimizing hard inquiries
- Keeping your credit accounts open, demonstrating a longer credit history.
3. Why Was It Developed?
The FICO Resilience Index gives lenders a better way of determining your credit risk during an economic downturn. By using the regular FICO, a credit score of 650 could be a reason to deny your application. But that score could be due to a late payment or other mistakes that you’ve corrected. However, if you have an emergency savings account and good income, you might be better able to weather an economic downturn than someone with a higher FICO score.
4. How Is It Different from Your Regular Credit Score?
Your regular FICO reviews your current and past credit history. It assesses a score based on your performance, without considering outside influences.
The FICO Resilience Index looks forward, seeking to predict what is likely to happen to your ability to handle credit during a recession or other economic downturn.
Your regular FICO is based on your history of managing debt. The higher the score, the more creditworthy you are deemed to be.
The FICO Resilience Index is more focused on how many open credit accounts you have and your total debt. The assumption is that if you have a lot of debt, and the economy spirals downward, you will be less able to pay your bills.
5. How Will Lenders Use It?
You’re not likely to experience anything different when you apply for credit right now. The new tool needs to be tested and evaluated. It will not replace your regular FICO credit score, nor make it any less important. Ultimately, creditors will probably look at both indices to determine whether to approve or deny your application for credit.
To have a FICO Resilience Index score, you need to have opened at least one credit account in the last six months or earlier. Lenders will need some time to test out this new scoring tool. You can take steps now to improve your situation before the FICO Resilience Index does become routine. Work on reducing your credit utilization ratio, pay your bills on time, and minimize the hard inquiries on your credit report.