Might the rising tide of debt slow to a trickle?
If so, the U.S. consumer will likely find harder times ahead, if the credit spigot tightens.
As reported by The Wall Street Journal on Thursday (Jan. 23), Fair Isaac Corp., which creates and maintains FICO scores, is changing the way it calculates scores for some individuals. The net effect will be that it may be harder for many Americans to qualify for loans — in an age, we note, where debt levels and personal lending have been on an upswing.
In terms of the changes themselves, individuals who already have “high” FICO readings above 680 and who are shouldering their debt burdens and making timely payments will see higher scores. Conversely, those consumers with FICO scores below 600 and who are missing payments will see lower scores than had been seen previously.
In addition, the news outlet reported, Fair Isaac will “flag” borrowers who sign up for personal loans.
“The changes will create a bigger gap between consumers deemed to be good and bad credit risks,” noted the Journal.
The changes seem to herald more conservatism in credit scoring, and greater attention to risk tied to debt. The FICO changes also come after credit models had started to embrace additional data (such as bank account balances) and removed some traditional score dampeners such as civil judgements — from reports. Those changes tended to lift scores higher — and of course, the higher the FICO score, generally speaking, the easier it is to secure a loan.
“There are some lenders that see there are problems on the horizon in terms of consumer performance or uncertainty [about] how long this [recovery] is going to go,” David Shellenberger, vice president of scores and predictive analytics at FICO, said in the report. “We definitely are finding pockets of greater risk.”
Lenders can embrace the new FICO scores — or not, and they may opt for a competitor like VantageScore. But FICO is traditionally used as a key factor in decisioning by lenders.
The newer versions of FICO, including FICO 10 T, will place more emphasis on missed payments, which in turn will drive scores lower. And consumers who have high “utilization ratios” measured by borrowings divided by credit limits, will also have lower scores.
“FICO for the first time will place more weight on personal loans in a way that penalizes some borrowers. For example, consumers who transfer credit-card debt to a personal loan but continue to rack up credit-card balances will likely experience a bigger drop in their credit scores,” the news outlet reported.
Experian reported late last year that personal loan balances are now more than $300 billion, as measured through the second quarter of 2019, and that tally was up 11 percent. Credit card debt stood at more than $1.3 trillion, per data from the Federal Reserve Bank of New York, at levels surpassing those seen more than a decade ago in the U.S. financial crisis. The average interest rate on cards stands at more than 19 percent, as calculated by WalletHub.