This newly developed FICO Resilience Index does not replace your conventional credit rating; however, it may play an undefined role in your approval for loans after you have applied.
FICO developed this new rating system, known as the FICO Resilience Index, as a means to aid lenders in determining your ability to repay debt. In simpler terms, it allows lenders to estimate how well you would be able to make payments on your debts in economic downturns and/or periods of instability using your credit report data.
Your traditional FICO score is used to determine how likely you are to pay your debts back. In theory, the FICO score does not take into account current or previous economic conditions; therefore, it does not give you an accurate measure of your potential for timely payment on debts should you experience an economic crisis or other external shock. The Resilience Index, on the other hand, allows lenders to estimate, via your credit report data, your ability to pay back debts during times of economic shocks, such as when job layoffs or other regionally based economic downturns occur.
The correct term is “rating”, as opposed to score, and that is intentional. With many scores, the higher the better. The Resilience Index has the opposite scale of lower being better. The Resilience Index uses an established scale of 1 to 99; therefore a person rated 1 on this scale would be considered highly resilient, but if your rating is closer to 99 you would be viewed as highly vulnerable to an economic disruption.
FICO has divided up the rating scale into the following four groups;
- 1 to 44 – More resilient
- 45 to 59 – Moderately resilient
- 60 to 69 – Sensitive
- 70 to 99 – Very Sensitive
If you fall into this first group (1 – 44 rating category), lenders would consider you as someone who would be able to endure financial difficulties. On the other hand, if you fall into this last group (70 – 99 rating category), lenders would more than likely consider you to be a higher risk than an individual who receives the more resilient rating (1 – 44 rating category).
This type of rating is based on a set of previously established non-secret criteria that includes; credit history and time in credit. What changed is how the data is analyzed and how FICO weighs the data.
The credit history has been one of the most important in determining the resilience of an individual. The longer the applicant’s credit history AND the more consistently the applicant has made on-time payments, the more likely they are to have been able to weather financial storms, and, therefore, will be viewed in a positive light by lenders.
Secondly, have low revolving balances. In simpler terms – don’t max out your credit cards! If you carry high balances, the lenders may consider your income to be at risk if your income were to fall suddenly. Balances that are low indicate that you are not putting yourself in jeopardy by using all of your available credit.
The third factor is having fewer active accounts. This indicates that you are in good standing with either one or two accounts rather than having a larger number of accounts with amounts owed on each. If income were to disappear, having fewer open accounts means fewer chances to miss payments.
The fourth factor would be having fewer recent inquiries for new credit. Having a large number of inquiries within the last 12 months could indicate that you aggressively borrow money. Such aggressive borrowing could result in higher risk. Fewer inquiries project stability.
Lastly, your classic credit score factors – payment history and total debt – are still considered. However, they are not weighted the same in this type of rating as they are in your traditional FICO Score rating.
If your credit score is rated above (740) excellent, you should still be approved for credit without any issues. Likewise, if you have an extremely low credit score (580) your rating will not change much.
If your credit score is between 580 and 740 (fair and good), your lender may use a different method of evaluating your creditworthiness than the standard credit report. Specifically, when applicants have similar scores and applications, the Resilience Index will be considered as a factor in deciding which applicant has the better likelihood of repaying the loan.
In practical terms, this means that an individual with a “fair” score may be granted a loan, while an individual with a “good” score will be subjected to additional scrutiny based upon that person’s Resilience Index rating.
Timing is important in that this program was introduced during a time when lenders are concerned about the possibility of a recession. Therefore, tools to determine an applicant’s financial resiliency become very appealing during times of uncertainty.
To maintain a high Resilience Index rating, you’ll want to keep your credit card balances at a minimal level, avoid opening any new credit cards or accounts that are unnecessary to your day-to-day needs, limit the amount of hard inquiries on your credit report, and last but not least, make all of your payments on time and relatively consistently.
Essentially, what they both have in common is the same smart way of getting credit.
The Resilience Index is not a substitute for your credit score. It doesn’t cancel out your history, nor is there a way to obsessively manage everything about it overnight! However, it does provide a reflection of how ready you seem when life gives you financial curveballs.
In times of uncertainty, the appearance of being stable is just as important as being perceived as being responsible.
Thus, while others are just sitting there watching their scores; it might be helpful for you to build up some resilience too (quietly).
