FICO Fact: Does FICO’s Minimum Scoring Criteria Limit Consumers’ Access to Credit?
Over the last 30 years, FICO has continued to analyze the minimum amount of credit bureau data that is necessary to deliver a reliable, predictive FICO® Score to the market.
Does FICO’s minimum scoring criteria limit consumers’ access to credit?
Simply put, the answer is no. Over the last 30 years, FICO has continued to analyze the minimum amount of credit bureau data that is necessary to deliver a reliable, predictive FICO® Score to the market - which benefits both consumers and lenders alike.
As a reminder, we have found that at least 6 months of credit history, as well as data reported within the past 6 months, is required in order to best ensure that the consumer’s current financial position is sufficiently reflected. Our research has consistently found that models that rely solely on sparse and/or outdated credit information are less reliable at forecasting future performance.
Diving in a bit deeper, this means that, unlike with other scores in the market, consumers that just opened their first trade line, such as a credit card, would not be eligible for a FICO® Score before they have ever made a single payment. A payment history of at least 6 months is necessary to derive a consistently predictive and reliable credit score. At any time, there are approximately 2.5M consumers that have recently opened a credit account, but don’t yet have the necessary 6 months of repayment experience in order to obtain a FICO Score based solely on traditional credit bureau data. Allowing consumers to build their credit repayment history over six months before assigning them a FICO Score will result in a consistently more accurate assessment of their credit risk, and with it, confidence by lenders to extend credit to these consumers at more favorable terms.
There is a larger population of roughly 16.2M consumers that do not have sufficiently current credit bureau data to generate a score. These consumer files are often referred to as “stale” or “dormant” files. Within this consumer population there are two distinct groups that have very different credit profiles.
The first group of approximately 7.4M consumers are often referred to as the “credit retired” population. In examining the credit files of the credit retired population, we find that they tend to have overwhelmingly positive repayment history, but simply stopped using credit. As you might suspect, the general appetite for additional credit among this population is quite low, making up 1-4% of the total applicant pool. The median age of the credit retired population is 73 and time since the last update to their credit files is 4.5 years.
The second group of approximately 8.8M consumers are those that lost access to credit and generally appear to have encountered economic difficulty as they often have significant amounts of negative information reported in their credit files. With no new, positive data flowing into their files to offset the negative data present, these consumers would likely score too low to obtain credit. In fact, we estimate that some 94% of these “lost access to credit” consumers would be assigned a benchmark score[1] of 620 or below, perpetuating their lack of access to affordable credit.
The median age of this group is 43, considerably lower than the “credit retired” population, and still very much in a stage of life where credit access is important. This population can best be helped back onto the credit ladder by the use of alternative data that resides outside of the traditional credit bureau file, where a return to financial health can be observed and incorporated into a FICO Score calculation.
Delivering less predictive and often low scores to the market using only sparse and/or stale credit bureau data is not a recipe for helping consumers gain access to credit. FICO has found the answer to supporting lenders in identifying credit ready consumers is to augment traditional credit bureau data with FCRA compliant alternative data such as telecom, utilities, public record, and checking account data to provide a predictive and reliable score that lenders can use to responsibly expand access to credit.
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[1] For comparison purposes, we created a benchmark score that was built using only credit bureau data but that scored people by loosening the FICO minimum scoring criteria (which results in scores being calculated even when the only data available is very sparse or stale).
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<p>FICO’s latest research on <a href="http://www.fico.com/en/blogs/risk-compliance/us-credit-quality-rising-the-beat-goes-on/" target="_blank">national FICO® Score distribution</a> shows that US credit quality continues to trend upwards, with an increasing number of consumers scoring in the highest scores ranges. Given that, we decided it was time to refresh our study on “<a href="http://www.fico.com/en/blogs/risk-compliance/infographic-what-does-a-high-credit-scorer-look-like/" target="_blank">FICO® Score high achievers</a>,” where we examine the credit behavioural profiles of consumers with higher credit scores.</p> <p>As expected, our latest study showed that older people generally have higher scores, as has been the case in our <a href="http://www.fico.com/en/blogs/risk-compliance/age-before-beauty-credit-worthiness-before-youth/" target="_blank">past research</a>. This is largely because they have trade lines that have been open longer, which leads to higher scores (assuming the trade lines are in good standing and all other things equal). The most credit savvy among you will remember that length of credit history accounts for roughly 15% of the overall <a href="http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx" target="_blank">FICO® Score calculation</a>.</p> <p>But for younger consumers, it isn’t too helpful to say, “just wait until you are 50 years old, and that will fix things!” Thus, I decided to dive deeper with our analysis, including looking at the credit behavioural characteristics of younger consumers with high FICO® Scores.</p> <p>In this analysis, I looked at credit characteristics for the two highest score bands, 750-799 and 800-850, which have about 16% and 23% of the population, respectively. I further broke this down by looking at the characteristics of the youngest 15% in each group, which occurs at age 29 for the 750-799 group and 43 for the 800-850. We used FICO<strong>®</strong> Score 9 for our analysis, and examined typical variables of the categories that go into the make-up of the score.</p> <p><a href="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png"><img class="alignnone size-full wp-image-29367" src="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png" alt="fico-score-high-achiever-table" width="715" height="747" /></a></p> <p>Since there’s a lot to dissect in this chart, I’ll highlight a few findings that struck me: <ul> <li><strong>Credit history.</strong> Higher scores are undoubtedly associated with a longer time on file. What’s striking is the higher average time on file for the 800+ group, both overall and for revolving accounts (the most common trade line). Clearly, it helps to start credit use early in life – but that’s not the sole determining factor for high scoring. The younger cohorts in both the 800+ and 750-799 groups have time on file medians significantly less than their older counterparts.</li> <li><strong>New credit.</strong> High credit scorers do, in fact, pursue new credit. We see little variation in months since last trade line opening and last inquiry among all groups observed.</li> <li><strong>Pay on time.</strong> As you might expect, the further in the past the delinquency, the higher the score – and that’s <u>if</u> a delinquency ever happened. 95% of the 800+ people and 72% of the 750-799 group have never been delinquent, which is a striking contrast to the 57% for the total population. The percentages for the younger groups are even higher, especially so for the 750-799ers. Collection items are also scarce for these high scorers. While 23% of the national population have collection items greater than $99, the figures are only 0.5% for the 800+ group and 3% for the 750-799 group. It is clear that, in conjunction with starting a credit file early, paying on time is a key trait of the FICO® Score high achiever.</li> <li><strong>Balance and utilization.</strong> Finally, we look at how credit is being used, focusing on revolving product use. (Since most people only have one mortgage or one auto loan, variation in instalment product figures is minimal and driven by payment history, which is near perfect for high scorers, as we’ve seen.) FICO® Score high achievers tend to have more open revolving accounts. While the % active trades and utilization are generally lower, by no means do high scorers avoid the use of credit products. What drives the difference here is the amount of <u>available</u> revolving credit utilized. The 800+ group is roughly 1/4 of the national median, both in total and on their highest utilized card; they also have lower balances and more cards<em>. </em>The 750-799 group is more active and higher utilized, but still only at 2/3 of the national figures. The young 750-799 group compensate with lower revolving balances and, as a result, lower utilization, which is in line with what we see for the 800+ group.</li> <li><strong>Benchmarks.</strong> I’d like to point out that while this study provides good benchmarks of the typical credit traits of the FICO® Score high achiever, individual credit profiles will vary widely. And keep in mind that when we sort groups of consumers as a whole by different behaviours, some results may look superficially odd. For example, the 800+ band has a longer median average open account time (128 months) than average revolving months on file (140 months).</li> </ul> So, what do we conclude? A huge takeaway is that high scorers don’t have too much in the way of serious delinquencies and negative public record data.</p> <p>In most respects, the young 800+ people are like their peer group. They really only differ markedly in their shorter credit history and higher non-mortgage balance, both of which are a function of life stage. Our results show that you don’t have to be a credit product hermit; these high scorers have more credit cards. The takeaway is to start credit activity early and maintain well-managed and moderate usage.</p> <p>In many ways, the young 750-799 people are more interesting because their age profile is much younger. Their credit characteristics differ more from their peer group, particularly in terms of length of credit history. They compensate by having almost pristine credit records and lower balances.</p> <p>Ultimately, 39% of US consumers are FICO® Score high achievers, which they accomplish by following common-sense credit practices. It ain’t rocket science!</p>
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