Today's “No Hit” Applicant May Be Tomorrow’s Profitable Long-Term Customer
Auto-declining applicants with no credit bureau file can be a missed financial inclusion opportunity
While many lenders have steadily expanded lending to so-called “thin file” applicants, referring to consumers with very little tradeline history on their credit bureau files, many still have policies to automatically decline or perform an expensive manual review of applicants without a credit file-aka “no-hit” or credit invisible applicants. But no-hit applicants – the majority who are newly scorable with FICO® Score XD - can be a promising segment for lending expansion compared to other consumer segments that can’t receive a credit score based on traditional credit bureau data alone. FICO Score XD leverages alternative data sources to give lenders a second opportunity to assess credit risk and enhance financial inclusion by identifying new credit ready borrowers.
There is a common assumption that no-hit applicants are too risky or riskier than other unscorable applicants. FICO research shows, however, that on average, 47% of no-hit applicants scorable by FICO® Score XD have credit scores above 620, compared to 37% for new-to-credit applicants (those with new tradelines less than 6 months old). Given the significant size of the credit invisible U.S. population, at approximately 25 million adults, are lenders missing out on an important financial inclusion opportunity?
Mini Case Study Highlights Potential Value of Rethinking Your No-Hit Strategy
Recently, a U.S. credit card issuer and long-time FICO® Score XD user had deployed a lending strategy which included automatically declining all credit invisible applicants. With FICO’s help, they discovered that money was being left on the table employing this policy.
FICO was able to model the impact of expanding the issuer’s use of FICO® Score XD to credit bureau no-hit applicants. With conservative assumptions of a 50% scorability rate and 47% of scored applicants falling above the credit score cutoff of 620 by FICO Score XD, the improvement in modeled results was significant. The issuer could increase approvals of credit ready borrowers unscorable with traditional data by as much 400%, while only increasing the volume of scores pulled less than 50%. The client concluded that the potential gains and resulting improvement in cost-per acquisition with the new credit scoring strategy were compelling.
Approved Credit Invisible Applicants Tend to Earn Higher FICO® Scores Later
Even better news for lenders who take the additional step to evaluate applicants with no credit history: customers newly scorable with FICO® Score XD and scoring 620 or higher tend to migrate to higher FICO® Scores over the next two years, as the chart below illustrates. Given that your institution may form the first credit relationship for a customer who previously didn’t have a credit score, the ensuing loyalty can create future cross-selling opportunities that would be missed if this segment was ignored altogether.
ROI Modeling Support Now Available from FICO Subject Matter Experts
If your institution is interested in modeling the potential ROI or approval volumes associated with evaluating credit invisible applicants with FICO® Score XD and extending your scorable universe of credit ready consumers, reach out to your FICO subject matter expert today. Supported by robust ROI tools, illustrated in the screenshot below, FICO can help evaluate the impact of a new, more inclusive lending and credit risk management strategy for applicants lacking credit bureau files today.
FICO is a long-time leader in incorporating alternative data in credit scoring models to help expand credit access for credit ready consumers that don’t receive a FICO Score using traditional credit bureau data alone. As part of our Financial Inclusion Initiative, FICO developed FICO® Score XD using alternative data - to address the 25M credit invisible consumers and another 28M US consumers with insufficient credit history to be reliably scored with traditional credit bureau data alone. For more information about FICO® Score XD, visit fico.com/en/products/fico-score-xd or reach out to your FICO account representative.
To learn more about FICO’s scoring solutions, click here.
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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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