Today's “No Hit” Applicant May Be Tomorrow’s Profitable Long-Term Customer

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.