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FICO launches new score that calculates borrowers' financial resiliency during economic downturns

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Even before the coronavirus pandemic spurred state shutdowns and led to one of the fastest-hitting recessions in modern history, as many as 60 million Americans had difficulty qualifying for credit cards and loans. 

Early data shows that the squeeze will only get worse as the pandemic continues to disrupt daily life, with 39% of domestic banks saying they're already tightening credit standards on consumer loans and credit cards as of the second quarter of 2020. That's a trend Fair Isaac Corp., the company behind the popular FICO credit score, wants to help mitigate with the launch of their new FICO Resilience Index on Monday.

Similar to a credit score, FICO's new index looks at credit bureau information such as how much credit consumers are using, payment history, number of accounts open, the length of your credit history and the amount you currently owe. 

But while a credit score is designed to predict a borrower's credit risk without regard to the current economic environment, the FICO Resilience Index uses those same factors to examine a borrower's ability to financially weather periods of economic disruption or volatility. It ranks consumers on a scale of 1 to 99, with lower being better.

FICO Resilience Index ranks consumers by their sensitivity to severe economic stress. Consumers with scores in the 1 to 44 range are viewed as the most prepared and able to weather the next economic shift.

"It turns out there are tens of millions of consumers that have lower FICO scores, below 700, that do relatively well in a recession," Jim Wehmann, executive vice president of FICO Scores, tells CNBC Make It. "For the very first time, we can help lenders and consumers identify those who are going to be more sensitive to the downturn and those that are going to be just fine." 

Since the last recession, FICO has been studying over 70 million consumer credit files to find patterns among those who ended up missing payments and those who did not, Wehmann says. FICO then used that data to predict which consumers were positioned to better withstand economic shocks. If your credit profile looks similar to those found to be resilient in the past, your FICO Resilience Index score will likely be lower.

The Resilience Index applies different weights to the same factors used in credit scores. But unlike a credit score, delinquency doesn't matter as much, for example. Typically, if you miss a payment that's reported to a credit bureau and you have a good credit, it has a big impact on your score because it provides a snapshot of recent activity, Wehmann says.

But the Resilience Index score weighs other factors more heavily, such as low account balances and low utilization of your available credit. "You can have some level of delinquency and still be very resilient," Wehmann says.

While a credit score is still an important indicator for lenders, it doesn't take into account the what's happening in the economy. Because the Resilience Index score does, lenders should use both in tandem to get a more accurate picture of what a borrower brings to the table, Wehmann says.

With the release of the index, FICO aims to provide lenders with better insight into consumers' potential risk while allowing those with low FICO scores, but who are otherwise resilient, to continue to access credit that they might not otherwise get. 

"The traditional way of dealing with downturns, and we see it today, is that lenders raise their lending thresholds. They raise their cutoffs. And while obviously that's the prudent thing to do, we'd love for that to be a little more sophisticated and surgical and be able to evaluate some of the individuals below those cutoffs with more precision," FICO CEO William Lansing said during an April earnings call

FICO will initially distribute, for free, consumer resilience scores directly to lenders already using the company's credit scores. There are also plans to develop an option for consumers to check where they fall on the Resilience Index and to improve their score, Wehmann says.

"We've got an effort underway to see if we can make it digestible and understandable and presented in a way that will be helpful to consumers," Wehmann says.

Check out: The beginner's guide to credit scores: How to understand and improve your credit score

Don't miss: 110 million consumers could see their credit scores change under new FICO scoring

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