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Consumers are getting turned down for all sorts of financial products, from personal and auto loans to credit cards. The Wall Street Journal, using Equifax data, reports that credit card approvals totaled 483,000 in the week ending May 10, down from 856,000 in the week ending March 22. To compare to the year prior, weekly card approvals in 2019 "rarely fell below 1.2 million," according to The Wall Street Journal.
But as banks are tightening their lending requirements, a new tool is trying to prevent lenders from cutting off consumers' access to credit.
Fair Isaac Corp., the data analytics company behind the FICO credit score, has just launched the FICO Resilience Index, a new scoring model designed to help lenders better assess consumers' sensitivity to financial stress by looking at their capacity to survive financially though a downturn.
"The FICO Resilience Index, used in conjunction with a FICO Score, allows card issuers to limit access less than they otherwise would have because they can now identify borrowers who are more resilient to the economic downturn," Sally Taylor, VP of FICO Scores, tells CNBC Select.
FICO defines resilient borrowers as "consumers that are more likely to pay as agreed in the event of a recession."
The new scoring model ranks consumers' resiliency on a scale of 1 to 99. The higher your score, the higher the risk you will default on your payments; the lower your score, the more likely you are to make on-time payments even when the economy experiences a downturn.
The criteria to receive the FICO Resilience Index is the same as what is required to receive a FICO credit score: Your credit profile must show at least one open account that has been reported to a credit bureau within the past six months or more.
The FICO Resilience Index measures consumers by many of the same factors that credit scores do — including your payment history, outstanding balances, length of credit history, new credit and credit mix — with a big focus on borrowers who maintain a low credit utilization rate (meaning a low balance in comparison to their credit limit). But experts suggest it may be some time before lenders really utilize the new tool.
Below, CNBC Select spoke with two credit experts on how the new FICO scoring model will affect consumers and why a high credit score is still important.
"The impact of COVID-19 has exposed a need for change and innovation in nearly every aspect of the financial service sector," Bruce McClary, a spokesman for the National Foundation for Credit Counseling (NFCC), tells CNBC Select.
"While traditional credit scores may have been sufficient as an indicator of creditworthiness in years past, the suddenness and intensity of the economic impact resulting from the coronavirus pandemic have proven that we need to look beyond the score to adequately assess a consumer's financial resiliency."
Yet while the need for innovated credit scoring is urgent, lenders won't immediately use this tool to approve new lines of credit.
"It takes time for lenders to test and implement tools like this," financial expert John Ulzheimer, formerly of FICO and Equifax, tells CNBC Select. "Lenders will have to study and test the efficacy of the index and how it will impact their decisions and, of course, their bottom line."
The new tool may require trial-and-error, but the enhanced data is helpful in reflecting how people are functioning in the current state of the economy. The Resilience Index looks at metrics that show consumers' capacity to pay bills and, if lenders take your resiliency score into consideration when you apply for credit, it could increase your approval odds.
"If it's used, it can certainly impact how applicants are treated," Ulzheimer says. "Some declines may be turned into approvals, and vice versa."
Consumers most likely to benefit include those with low balances, especially in relation to their credit limit. A low credit utilization rate not only indicates a lower risk of missing payments, but it is also indicative of financial resilience. If you can maintain low balances while not using much of your available credit, it illustrates that you aren't in need as much as someone with a high utilization rate.
"To the extent your debt obligations are fewer and lower, the better positioned you are to ride out a rough economic patch," Ulzheimer says.
Before you turn your focus to your score on FICO's new Resilience Index, know that a healthy credit score is still important if you want to get approved for new credit.
You could be just beginning your credit journey and looking to apply for a secured credit card, like the Capital One® Secured, or maybe you are hoping to take advantage of earning cash back on all your grocery purchases with a card like the Blue Cash Preferred® Card from American Express. Whatever the case, know that working your way toward a good credit score — or already having one — will always come in handy.
The most important factor in a good credit score is your payment history. Making your payments on time and in full can help improve your credit score significantly over the long run. You should pay your credit card bill by the due date as a general rule, but in some cases (such as when your credit card bill is higher than usual) you could actually benefit from paying it sooner.
Make sure to pay attention to how much credit you use: Your credit utilization rate, or your debt-to-credit ratio, shows lenders how much of your available credit you use. Experts recommend a ratio below 30%, but the lower the better.
It may take some time before consumers see banks incorporating FICO's Resilience Index into their lending decisions, but when they do it could be the tiebreaker on whether or not you end up getting approved for something like a new credit card or a credit limit increase.
In the meantime, maintain a healthy credit score, or work on improving yours, to ensure the best approval odds.
Information about the Capital One® Secured has been collected independently by CNBC and has not been reviewed or provided by the issuer of the card prior to publication.
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