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As financial uncertainty continues amidst the pandemic, banks have tightened their lending policies. A report from the Federal Reserve Bank of St. Louis reveals that 38.5% of U.S. banks have imposed stricter lending standards in the second quarter of 2020. This mirrors the measures taken during the 2008 financial crisis, making it harder to qualify for loans or credit cards. However, a new FICO scoring model may offer a more accessible path to credit in the future.
Fair Isaac Corporation, which oversees the FICO credit scores, unveiled the FICO Resilience Index last month. Lenders may adopt this new scoring model alongside the traditional FICO scores to assess those who present a lower risk during economic instability.
According to a recent CNBC report, your FICO Resilience Index may be less affected by a missed payment or account delinquency. Instead, this new model emphasizes factors that demonstrate greater resilience to economic downturns, such as maintaining low balances and effective credit utilization.
FICO states that consumers with 'higher resistance' may possess the following traits:
More experience in managing credit
Lower balances on revolving credit (such as credit cards)
Fewer open credit accounts
Fewer annual inquiries into credit
The FICO Resilience Index assigns a score between 1 and 99. A lower score indicates a higher likelihood of staying current with payments during challenging economic times. A score ranging from 1 to 44 suggests you may be 'more resilient' in dealing with financial instability, while a score between 70 and 99 indicates a higher sensitivity to economic fluctuations.
FICO anticipates that its new scoring model will have a significant effect on the economy. By identifying consumers who are more resilient, the model could help reduce the over-tightening of credit by banks during economic downturns, which often hinders financial recovery.
To learn more about the FICO Resilience Index and how it differs from your regular FICO scores, click here.
