You’ve probably heard that credit has become “tighter” recently. This means that credit card issuers are taking steps to decrease their own risk, such as lowering credit limits or canceling credit card accounts. And often, the requirements for credit approval become less flexible.
This happened during the Great Recession of 2007 to 2009. We’re in a recession right now, but there’s an added air of uncertainty because this isn’t the result of an economic cycle.
Also, many people are in hardship programs, and that makes it even more difficult for lenders to decide who’s creditworthy and who’s not.
That’s where the FICO Resilience Index comes in. This index is an analytical tool, not a new credit score. Whether this tool helps you get approved for credit depends on whether you’re deemed “resilient” by the new index.
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What Does Resilience Mean?
A person who is resilient adjusts well to changes in his or her circumstances. In this case, the focus is on economic resilience.
According to FICO, four qualities suggest a consumer will bounce back from financial adversity:
— The consumer has experience managing credit.
— The person maintains a low amount of revolving balances, which means a low credit utilization ratio.
— The individual has generated a low number of credit inquiries in the last year.
— The consumer has just a few active accounts.
If you think about it, these are the credit habits that generally help you earn a very good FICO score.
The last bullet point may be a bit confusing, though. You can have a lot of accounts and have a great score, but in the context of a pandemic, this could be viewed as being desperate for credit.
Now, although the FICO Resilience Index isn’t a credit score, it does have a number range, which is from 1 to 99. Unlike the FICO score, you want to have a low index number. Preferably, your index number should be no higher than 44.
This index helps lenders determine how much credit, if any, they should offer you. If you have many years of credit use under your belt, a good payment history, a reasonable number of accounts and low card balances, you’re more likely to have a low Resilience Index number.
How Will Lenders Use the New Index?
The FICO Resilience Index is designed to be used by lenders to help assess an individual’s creditworthiness. A credit card company, for instance, would use the FICO Resilience Index in conjunction with a consumer’s FICO score or to generate an adjusted FICO score.
A lender would look at your number, and if it’s no higher than 44, you would be considered a person who is resilient during an economic downturn. The number is also accompanied by reason codes that help a lender understand the factors that influenced your index number.
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Who Benefits From the FICO Resilience Index?
It seems like every time the credit industry whips out a new version of a credit score or introduces a new analytical tool, it’s presented by media outlets with great fanfare. But the point is rarely made that consumers only benefit if a lender actually uses it.
Let’s say you applied for a credit card that requires good credit, and your lender requests to see your FICO Resilience Index number.
If you have only a fair-to-good FICO score of between 660 and 690 but a low index number, then the index tool might help you get approved. The lender might see this as a sign that you’re resilient and that you’re more creditworthy than your 680 FICO score would suggest.
But the opposite could happen as well. You could have a good FICO score but generate a high FICO Resilience Index number. This combination could keep you from being approved for credit.
It’s always a good idea to be aware of what a lender looks at when reviewing your credit application. Now, a lender will evaluate your credit report, your FICO score and, possibly, your index number.
If you think the index number bolsters your case for credit, you can mention it to your lender. Just remember that it’s the lender who decides if it will be used and what the effect will be on the approval process.
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What You Need to Know About the FICO Resilience Index originally appeared on usnews.com