All posts by Frederic Huynh

Risk & Compliance Does the FICO® Score Work in Both Good Times and Bad?


As I engage clients about the recently released FICO® Score 9, one of the questions that comes up frequently is how effective will the score be if it is used in a more turbulent economic period.  The FICO® Score 9 development sample was based on an October 2011 to October 2013 timeframe.  For many lenders, this represents an extremely clean vintage as losses were extremely low.  They wondered how a score developed on data that was so pristine would hold up under a more unsettled time period. Over the last 25 years, there is an extraordinary body of work that demonstrates that the FICO® Score performs well in both good economic times and bad.  Since the first FICO® Score was released in 1989, we’ve validated various versions of the score across many different points of the economic cycle and for a wide variety of industries (auto, bankcard, mortgage, etc.) for... [Read More]

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Risk & Compliance Delivering What Customers Asked for in FICO® Score 9


What a year this is shaking out to be. We recently completed the FICO® Score 9 development at all three Consumer Reporting Agencies (CRAs) and are now working with them to make these models generally available. Now that the scores have been launched, I wanted to take a moment to summarize some of the key benefits you will see. The Voice of Customer sessions we held with our clients helped define our research focus and development objectives for FICO® Score 9. Over the several years, we’ve been researching and developing various features of the new score. Here’s a summary of some of the key features of FICO® Score 9. Refreshed – FICO® Scores are redeveloped periodically to account for a changing credit landscape and to incorporate advancements in predictive modeling. Much has happened since FICO® 8 was released – between the mortgage crisis and the ensuing recession, the credit landscape... [Read More]

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Risk & Compliance Deleveraging Continues for Youngest Consumers


Recently, my team did some analysis of consumer credit risk trends and behaviors over time, focusing on debt breakdown by age. Since there was tremendous interest when I blogged about similar research last year, I wanted to share some of the latest findings. Compared to the prior year, we continue to observe slight deleveraging across the total population. The average total debt for consumers in October 2012 was $80,812. In October 2013, that number inched back 3.1% to $78,274. Breaking out those debt numbers by age, we observe a clear relationship in the relative change of deleveraging: the older the demographic, the smaller the observed reduction in debt.   For young consumers, the continued decrease in outstanding debt is being driven by lower average outstanding mortgage debt and lower average credit card debt. These debt categories yielded a reduction of 13.3% and 8.1%, respectively. In both timeframes, student loan debt still accounts for a little more than one-third of their total outstanding debt.1   The “credit card-less” rate for...

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Risk & Compliance US Credit Quality Continues to Inch Forward


We recently crunched the data from the latest national distribution of FICO® Scores. Our findings reveal a continued slow but steady improvement in US consumer credit quality.   Though the median FICO® Score has remained 711 since 2011, there are positive signs in score movement in the most recent timeframe, from October 2012 to October 2013. Specifically, we continue to see that the number of consumers in the lowest score ranges is shrinking. In fact, it’s hit its lowest point since peaking in October 2009. In October 2013, 24.0% of consumers scored less than 600, down from 24.4% in October 2012. We’ve almost reached our pre-recession benchmark of 23.8% in October 2007. The score movement table below reinforces this general positive shift in credit health. The table shows how the scores of different pockets of consumers migrated between October 2012 and October 2013. In general, more consumers are moving to higher score intervals than to lower score intervals. Many consumers, however, remain in their current score band.    Many risk...

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Risk & Compliance Secret to Scoring More Consumers? Alternative Data—With A Catch


As I discussed in my last blog post, many of our banking clients have expressed interest in scoring more US consumers. But we've heard little support for doing so by loosening the minimum score criteria used by the FICO® Score and relying solely on traditional credit reports. Clearly, lenders are wary of making credit decisions based on extremely marginal or stale credit bureau files. There is a better way—one that our research has shown can deliver statistically meaningful credit scores for 60-75% of traditionally unscorable consumers. The secret? Supplementing traditional credit bureau data with alternative data. Before rushing to declare alternative data as a panacea, the devil remains in the details. Not all alternative data passes muster in terms of driving a more effective credit risk score. In today’s Big Data world, there are many alternative data providers and thus many potential new data sources. Having more data is generally good, but it is important to resist the temptation of indiscriminately throwing multiple data sources together to bake...

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Risk & Compliance Score More Consumers? Lenders Weigh In


Over the past six months, there’s been a lot of marketing hype about scoring significantly more consumers than ever before. It’s an issue we regularly discuss with clients, and recently we did an in-depth pulse check with major lenders to deepen our understanding of how the FICO® Score can support their needs. Not surprisingly, at the conceptual level, almost all lenders want to score more US consumers. But once we dug deeper, our findings were more nuanced. In brief, there was little support for solving this challenge by loosening the minimum score criteria used by the FICO® Score. In our latest discussions, we talked to a disparate group of financial institutions, from very large organizations down to smaller and regional players, and from lenders focused on super-prime through to those targeting near-prime customers. We received input across various financial industries, ranging from revolving products to auto finance to mortgage, and various functional roles, including risk management, account acquisition, customer management and more. Some of the...

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Risk & Compliance Research into Scoring More Consumers, Part 3


I've been blogging about the science behind who gets a FICO® Score and the three critical analytic questions that must be answered before scoring more consumers. In this post, I'll discuss recent FICO research addressing the third question: Is the relationship between risk and score consistent for potentially scorable and traditionally scorable consumers? (See my posts for question 1 and question 2.) This consistency is essential to effective credit scoring, and it's what we model developers mean when we ask whether the “odds-to-score relationship” is appropriately aligned. In layman's terms, when two consumers with two completely different profiles have the same score, it should represent the same level of risk. Here’s the challenge for scoring more consumers: Our research has shown that this consistent odds-to-score alignment doesn’t hold true for some currently unscorable consumers when compared with the larger traditionally scorable population. Take, for example, credit files with no account reported in the last six months—which...

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Risk & Compliance Student Loan Debt Spike Drives Higher Debt Load for Late Payers


As a follow up to our recent research on U.S. credit trends, the FICO Labs team has looked at how debt has changed for “delinquent” customers – defined here as people who are 60+ days behind on any one credit account – and the rest of the population. Our analysis shows that, while late payers owe less on average, the amounts owed have risen in the last five years, at a time when the rest of the U.S. population has been deleveraging. In fact, the average debt held by consumers who are behind in their debt repayments rose 17 percent between 2007 and 2012. The mean total debt for consumers who were 60+ days delinquent on at least one account grew from $53,706 (adjusted for  inflation) in October 2007 to $62,642 in October 2012, fuelled largely by student loan debt and mortgage debt. We reported last year on the rise in student loan debt, and our new analysis shows more cause for concern. Student loan debt was the fastest-rising component for delinquent consumers, rising 89 percent since 2007. The mean student loan debt also rose 58 percent for the...

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Risk & Compliance Research into Scoring More Consumers, Part 2


In my last post, I introduced the three critical analytic questions that must be answered before scoring more consumers, and shared recent FICO research around the first question. In this post, I'll discuss research addressing the second question: Is there sufficient credit repayment history to predict future repayment behavior? Addressing this question requires a quick review of Predictive Modeling 101. At its core, a credit score evaluates past behavior to predict future behavior. To build a model that predicts future repayment behavior, you need to observe some repayment behavior—otherwise, what are you modeling? To develop the FICO® Score, we look at credit behavior at two different points in time, 24 months apart, as shown in the graphic. The consumer credit file at Snapshot A is used to calculate the score’s predictive variables. The same consumer’s credit file at Snapshot B is used to categorize the consumer as a good payer or a bad payer based on how he (or she) paid his credit obligations during the 24-month window. Only consumers with...

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