FICO Resilience Index: What is it?

Apr 20, 2021 | Credit Education

FICO, the maker of the FICO credit scores that are commonly used in lending decisions, has created a new type of credit scoring tool to help lenders better evaluate credit risk in today’s shaky economy: the FICO Resilience Index.

Many consumers are understandably concerned to learn that there is yet another type of credit score to keep track of. In this article, we have covered everything you need to know about this new credit scoring model so that you can come to an understanding of how much you should be worried about the FICO Resilience Index.

What Is the FICO Resilience Index?

The FICO Resilience Index is a new type of credit scoring model that is intended to predict a consumer’s financial resilience during an economic recession. In other words, it is supposed to indicate how well or poorly a consumer will be able to keep meeting all of their financial obligations when the economy is in bad shape.

The Resilience Index ranges from 1 to 99, with lower scores signifying that a consumer is well-positioned to be able to weather an economic downturn and higher scores signifying that a consumer appears to be more vulnerable to falling behind on bills during a poor economy.

FICO states that “Consumers with scores in the 1 to 44 range are viewed as the most prepared and able to weather an economic shift.” An index rating of 45-59 is categorized as moderately resilient. A rating of 60-69 is considered to be sensitive to economic turbulence while the 70-99 range is considered to be very sensitive.

What Is the Purpose of the Resilience Index? More Sophisticated Tools Are Needed for Better Risk Analysis During Economic Instability

During an economic recession, lenders try to avoid financial losses by restricting credit availability to prevent consumer defaults.

When the economy is struggling, so are lenders and borrowers alike. Consumers with debts to pay may struggle to meet all of their financial obligations, which means creditors are faced with more severe losses than usual.

As a result, lenders try to hedge their bets and protect against further losses by tightening requirements to qualify for new credit and even slashing the credit limits of current customers’ accounts. This hurts both consumers and lenders since consumers lose access to credit and lenders earn less revenue.

This “over-tightening of credit,” FICO says, could slow down the economy’s recovery.

The FICO Resilience Index was created to help alleviate this problem by giving lenders a more complete picture of each consumer’s level of risk.

FICO credit scores already provide a general measure of consumer credit risk, but the Resilience Index is meant to be applicable to the more specific situation of an economic recession or depression.

Consumers Are Not All Equally Sensitive to Financial Stress, Even Those With Similar Credit Scores

According to Equifax, even consumers with the same or similar credit scores have different levels of “sensitivity to financial stress,” which means there are consumers within these narrow credit score groups that present more of a risk than others during financially stressful times.

For example, all consumers with a 650 credit score represent a similar risk level during typical economic conditions. However, during times of financial hardship, some of these consumers will be more susceptible to falling behind on bills than others, despite having the same credit score. The Resilience Index is meant to capture this variation in risk level that is not apparent from a consumer’s credit score.

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