FICO® Resilience Index - Benchmarking Portfolio Resilience
Highlighting results from FICO’s release of FICO® Resilience Index benchmarking reports for 2022
FICO recently released its second set of FICO® Resilience Index benchmarking reports, revealing interesting insights and trends about lending portfolio resilience over time. FICO Resilience Index is designed to rank order consumers with respect to their resilience to severe economic stress. These benchmarking reports compare the distributions of new and existing accounts across different portfolios (and at the consumer-level). Spanning a series of five industry snapshots between 2007 and 2022, these analyses give lenders the ability to identify strengths and potential vulnerabilities in their resilience profiles relative to the industry’s.
We can infer from these analyses that consumer sensitivity levels respond to the actions and attitudes of both lenders and borrowers. As measured by FICO® Resilience Index 2, borrowers entered the Great Recession with historically high sensitivity, possibly influenced by more lenient lending practices and less restrained borrowing. In contrast, both new and existing borrowers in 2013 had historically low sensitivity levels, following years of conservative post-recession lending and borrowing.
Impact of borrower sensitivity on default rates in stressed economy
As seen in Figure 1, the impact of higher sensitivity on borrower repayment behavior was material during the Great Recession. Across all FICO® Score ranges, the most sensitive 20% of borrowers significantly underperformed the most resilient 20%. Portfolios with below-average resilience levels would therefore likely have experienced higher credit losses through the Great Recession compared to those with a similar FICO Score profile but higher resilience.
Figure 1: Serious (90+ days past due) delinquency rate by FICO® Score 8 band and FICO® Resilience Index 2 quintile, all industries account management Oct 07-Oct 09. More sensitive borrowers experienced significantly higher default rates during the Great Recession than more resilient borrowers across all FICO® Score bands.
Recent FICO® Resilience Index trends
As seen in Figure 2, both existing and new borrowers became more sensitive overall from 2021 to 2022 but remain below peak 2007 levels. Across all snapshots, existing borrowers were more resilient than new borrowers.
Figure 2: Average FICO® Resilience Index 2 by snapshot, all industries account management vs account origination.
Increases in average FICO® Resilience Index values over time correspond well to changes in the percent of borrowers in the Sensitive (60-69) or Very Sensitive (70-99) segments, as seen in Figure 3.
Figure 3: Percent of borrowers with FICO® Resilience Index 2 values in the Sensitive (60-69) or Very Sensitive (70-99) segments by snapshot, all industries account management (Apr 2022 score date) vs account origination (Jan 2022).
FICO® Resilience Index trends by FICO® Score band
Although FICO® Resilience Index is overall not well-correlated to FICO® Score, high FICO® Score borrowers (760-850) are consistently more resilient than lower-scoring borrowers. Interestingly, the borrowers most likely to be considered Sensitive or Very Sensitive had FICO® Scores in the middle of the range rather than at either end. In line with overall patterns, existing accounts were less likely to fall into these more sensitive segments than new accounts across all FICO® Score bands, as shown in Figure 4.
Figure 4: Percent of borrowers with FICO® Resilience Index 2 values in the Sensitive (60-69) or Very Sensitive (70-99) segments by FICO® Score 8 band, all industries account management (Apr 2022 score date) vs account origination (Jan 2022).
Balance-weighted sensitivity comparisons
FICO® Resilience Index is calculated at a consumer-level. Weighting its value by outstanding balance can provide additional insight about how much exposure to credit losses lenders face from their sensitive borrowers. Figure 5 reveals that balance-weighted sensitivity levels were higher than overall sensitivity levels for both new and existing borrowers, reflecting the fact that sensitive borrowers tend to have higher balances than resilient borrowers.
Figure 5: Average FICO® Resilience Index 2, overall and balance-weighted, all industries account management (Apr 2022 score date) vs account origination (Jan 2022).
FICO® Resilience Index distribution impact simulation
To put differences in overall resilience levels in context, the following simulation examines a “what if?” scenario that assumes borrowers were more resilient at the start of the Great Recession than they were. Specifically, we simulated credit risk performance from October 2007 to October 2009 across four key industries (mortgage, bankcard, unsecured personal installment lending, and auto finance) assuming FICO® Resilience Index distributions by FICO® Score band as of October 2013. No change was assumed to FICO® Score distributions as of October 2007 so that the benefit of greater resilience could be isolated. Observed industry-specific default rates were calculated and applied by FICO Score band and FICO Resilience Index segment.
Based on this simulation, Figure 6 highlights potential reductions in 90+ days past due default rates ranging from 7% to 22%, providing strong evidence that greater borrower resilience entering the Great Recession may have mitigated its severity across all key industries.
Figure 6: Simulated default rates by industry, comparing actual 2007-9 performance to simulated performance assuming industry-specific FICO® Resilience Index 2 distributions by FICO® Score band as of Oct 2013.
Please visit the FICO Blog to keep up to date on all of FICO’s latest insights and offerings, including our recent post summarizing average FICO® Score benchmarks and drivers across the United States.
To gain more background about the FICO® Resilience Index, or to access the full set of benchmarking reports on which this analysis has been based, please visit https://www.fico.com/en/products/fico-resilience-index or contact ScoreSupport@fico.com.
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FICO® Score High Achievers: Is Age the Only Factor?
<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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