FICO Scores Hit Fifteen-Year Highs
Earlier this month, the Wall Street Journal reported that consumer credit scores have improved in recent months, despite economic uncertainties and hardships resulting from the coronavirus pandemic. The average FICO score was 711 in July, up from 706 in July 2019 and 708 in April 2020, which has been the highest scores seen since FICO started tracking this data in 2005.
The increase is largely due to the unprecedented governmental assistance by way of stimulus payments and extended unemployment benefits. However, experts have noted that credit scores typically lag behind any changes in financial situations.
“First the macro stress occurs, and then it takes a few months for the strain to show up in people’s credit reports,” said Ethan Dornhelm, vice president of scores and predictive analytics at FICO. He noted that governmental assistance is “having a further effect of pushing out that stress for many people.”
The lag also makes it difficult for lenders to evaluate risk, as credit reports have not yet reflected missed payments and delinquencies. Thus, lenders have sought new ways to assess consumer creditworthiness. Many have adapted their underwriting models to identify existing customers at a higher default risk and to avoid approving unemployed loan applicants.
In addition to using FICO scores, lenders are interested in reviewing customers’ bank-account data, and are considering using information from other financial institutions and cash-flow analysis to determine consumer creditworthiness.
“We are convinced that new ways of assessing credit eligibility, like reviewing personal cash-flow data, offer a truer reflection of risk, and many banks are quickly coming around to that idea,” said Steve Smith, Chief Executive of the fintech Finicity.
Additionally, a PYMNTS article noted that while consumers are paying down debt, they are still spending money. The Department of Commerce recently reported that September retail sales were higher than those of August 2020 and September 2019. Consumers typically drive about two-thirds of U.S. gross domestic product, and trends show consumer spending is moving towards pre-pandemic patterns.
