FICO Resilience Index

FICO has come out with a new metric that they call the FICO Resilience Index which, when paired with the FICO score, presumably better forecasts future delinquencies when the economy falters. It presumes to measure people’s resilience or sensitivity to economic downturns. FICO developed this index so that lenders and creditors may continue to lend to those people who will be likely to withstand the economic downturns, thus allowing greater profits than would otherwise occur if the lender reduced their credit risk by increasing the credit scores necessary to obtain new loans or new credit or by lowering credit limits on existing accounts.

The FICO Resilience Index ranges from 1 to 99, and unlike the FICO credit scores or other credit scores, lower numbers indicate lower credit risk. So someone with a score of 10 is more likely to continue paying their bills as compared to someone with a score of 50 or 90. This index score is being used to rank consumers according to the likelihood of their default under economic stress, especially for people with average credit scores, which is why this new metric is being characterized as an index.

Chart showing the FICO Resilience Score.

FICO has broken the score down into 4 ranges with different degrees of resilience or sensitivity to economic changes:

  • 1 – 44: Most resilient
  • 45 – 59: Resilient
  • 60 – 69: Sensitive
  • 70 – 99: Most sensitive

The FICO Resilience Index score places a greater weighting on the total amount of debt and the number of open accounts. This index score improves as either of these quantities declines. Specifically, this index is based on the following factors:

  1. total balances on revolving credit compared to the credit limits;
  2. the number of open active credit accounts;
  3. the number of hard inquiries within the last 12 months;
  4. the length of the credit history, with longer histories being much better.

Lower numbers for the 1st 3 factors and a longer credit history yields a better score. This scoring algorithm places the greatest weighting on the credit utilization, which is the total amount of debt on each line of credit compared to their credit limits. Note that having more open active credit accounts increases your FICO Credit Score, indicating lower credit risk, but also increases your FICO Resilience Index score, indicating greater risk, at least in economic downturns.

The FICO Resilience Index score was developed by evaluating hundreds of thousands of anonymous credit profiles from before and after the Great Recession, evaluating which factors best predicted future delinquencies. However, like the algorithms for creating credit scores, the FICO Resilience Index scoring algorithm is kept secret.

FICO is partnering with Equifax and Experian in this pilot project, including the index along with credit scores when lenders conduct a hard credit inquiry, which is an inquiry for credit information and credit scores when the consumer applicant is applying for new lines of credit. However, FICO has not said whether the FICO Resilience Index will be available to the general public.

According to FICO, you must have at least 1 account opened for at least 6 months and that was reported to the credit bureau within that same timeframe. However it is difficult to see how such a sparse credit file could reliably predict resilience.

Resilience is best predicted by net worth, since wealthier people have a much greater advantage in dealing with economic downturns, as has been repeatedly shown in previous economic downturns. But net worth is not listed in credit files, which credit scores of all types depend on, so FICO tested factors that are recorded in credit files that best predicts future delinquencies during economic downturns.

While FICO keeps its algorithms secret, there are some factors that seem most reasonable in predicting future creditworthiness.

Time will tell how well this index predicts delinquencies. Nonetheless, this ranking index will most likely be used for credit applicants with average credit scores. People with high credit scores will still continue to be able to get credit while people with poor scores will still have difficulty getting credit. Lenders will probably use this index along with credit scores as an additional means in deciding if a consumer with an average credit score gets credit and how much it will cost.