The financial effects of Covid-19 have extended to virtually all segments of the economy. Consumer lending is no exception. Lenders have responded to the recent adverse financial conditions, as they did in the 2008 recession, by increasing their credit score requirements. To combat the possibility that creditworthy individuals are denied loan approvals, FICO has unveiled a new credit score, called the FICO Resilience Index (FRI), specifically designed to measure an individual’s likelihood of default in periods of economic stress. While not meant to replace the old FICO score, the FRI gives lenders one more measurement in helping determine whether to grant a loan.
Difference Between FICO and FRI Scores
The FRI differs from the old FICO score in a couple of ways. First, the FRI gives little weighting to past payment history, which made up the largest component of the old score, reasoning that past payments may not be a good indicator of future payments during times of economic hardship. Instead, the FRI looks at four main categories:
- Credit mix. Installment credit (think car loan) helps the FRI score, while revolving credit (think credit cards) will hurt the score.
- Total Balances. Lower balances compared to available credit will improve scores.
- Total number of active accounts. Three or fewer active accounts indicate resilience, while active accounts greater than three indicate less resilient.
- Total number of credit inquiries made by lenders. Zero to one inquiry indicates resilience, while inquiries greater than one indicates less resilience.
Second, unlike the old FICO score which ranges from 300-850, the FRI range is from 1-99 and a lower score actually indicates higher financial resilience.
Guidelines for Improving FICO and FRI Scores
The FRI score was developed to give lenders an additional tool in analyzing creditworthiness and serve as a more accurate indication of default risk, but in reality it may be quite a while before it is broadly used in the credit approval process. In the meantime, consumers can focus on improving both their FICO and FRI scores by continuing to follow a few simple guidelines.
- Pay your bills on time.
- Keep balances low compared to available credit.
- Keep the total number of credit accounts to a minimum.
- Don’t apply for several loans or credit cards at once.