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How to Avoid the 5 Most Common Pitfalls when Using the FICO Resilience Index

The FICO® Resilience Index is a new analytic designed to rank-order consumers according to their resilience to a downturn in the economy. It is built to reveal “latent” credit risk that manifests during periods of economic stress by providing additional rank-ordering of credit risk within narrow FICO® Score ranges.

As the FICO® Resilience Index is a powerful and novel tool, lenders might be challenged to use it most effectively. To help lenders benefit the most from its capabilities, we want to share a list of ways we have seen FICO Resilience Index misapplied, along with our advice about how to avoid these common pitfalls.

Pitfall #1: Validating the FICO® Resilience Index during an unstressed economy

The latent credit risks that FICO® Resilience Index predicts will only manifest – and therefore can only be observed – during a stressed period of the economy. Validating the FICO Resilience Index during an unstressed period therefore leads to inconclusive results, as it is not designed or expected to provide additional rank-ordering of credit risk in a benign economic environment.

  • Solution: Validate the FICO® Resilience Index over a stressed economic period. Choose a score date before the stressed period begins and a performance window long enough to allow the latent risk that existed at the score date to manifest. For example, we frequently validate FICO Resilience Index performance during the Great Recession based on a score date of October 2007 and measuring delinquency rates over a 24-month performance window ending October 2009. Similarly, we recommend validating performance during the current COVID-19-driven downturn based on a score date of January 2020 and measuring loan accommodation/forbearance rates over a recent performance window. While it can be interesting to confirm that FICO Resilience Index does not provide additional rank-ordering of credit risk during a benign period (for example, October 2013 to October 2015), only validation results during stressed periods will demonstrate whether FICO Resilience Index is “working.”

Pitfall #2: Looking at point-in-time FICO® Resilience Index metrics rather than performance over time

FICO® Resilience Index is a predictive analytic that differentiates expected credit risk performance through a period of economic stress. Evaluating it based on a single snapshot does not demonstrate its ability to differentiate latent risk as it emerges. Because FICO Resilience Index is meant to complement traditional FICO® Scores, it does not necessarily correlate well to delinquency rates or other indicators of credit risk at the time of scoring and may even have counter-intuitive relationships with traditional payment performance measures.

  • Solution: Validate the FICO® Resilience Index over a period of emerging stress as described above. Only use point-in-time analysis of FICO Resilience Index to measure distributions and identify customer profiles and segments within a portfolio rather than to validate its effectiveness at measuring latent risk.

Pitfall #3: Evaluating the FICO® Resilience Index as a stand-alone metric

The FICO® Resilience Index is designed to complement traditional FICO® Scores; it does not rank-order credit risk on its own. Even during an economic downturn, very resilient consumers with lower FICO Scores may still have a higher expected probability of default than low-resilience consumers with higher FICO Scores.

  • Solution: Evaluate the FICO® Resilience Index together with the FICO® Score. FICO Resilience Index provides additional rank-ordering of credit risk within narrow FICO Score bands during periods of economic stress but does not rank-order credit risk alone at any point in the economy.

Pitfall #4: Waiting too long to adopt FICO® Resilience Index

Postponing adoption of the FICO® Resilience Index based on full operational readiness across all potential use cases may result in lost opportunities to start improving portfolio resilience sooner.

  • Solution: Develop a phased FICO® Resilience Index adoption plan to generate early benefits, even while exploring more refined or complex use cases. Prioritize high-value yet “low-friction” actions based on ease of implementation, customer impact and financial benefits. For example, expanding pre-screen programs to resilient consumers just below existing FICO® Score cutoffs can open lending channels to prospects with a more stable credit profile than their traditional FICO Score alone may indicate. Conversely, limiting or avoiding proactive credit line increases to low resilience consumers just above existing FICO Score cutoffs can minimize additional exposure to low-resilience consumers.

Pitfall #5: Turning FICO® Resilience Index on and off

Just as a car with superior brakes and warning systems is safer than an otherwise identical one without (regardless of driving conditions), a portfolio with an enhanced FICO® Resilience Index profile is more resilient than an otherwise identical one without (regardless of economic conditions).

  • Solution: Manage portfolio resilience at all points in the economic cycle. FICO® Resilience Index is designed to be an “always on” tool for lenders to use to help better understand and prepare their portfolios for unexpected – yet inevitable – periods of economic stress. We recommend that lenders add FICO® Resilience Index to their FICO® Score processes and update it just as frequently as they update FICO® Scores on existing portfolios.

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Avoiding these most common pitfalls will accelerate successful adoption of the FICO® Resilience Index. We encourage all lenders to explore how this additional dimension of credit performance can maintain greater portfolio stability through all phases of the economy.

FICO has produced a series of on-demand webinars covering best practice evaluation and use of the FICO® Resilience Index, including an 8-minute video that provides additional guidance on validating FICO Resilience Index in the current COVID-19-driven downturn considering limited delinquency reporting.

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