Could the rising tide of debt slow to a trickle?
If so, the American consumer will likely face tougher times ahead, if the credit tap tightens.
Like reported by the Wall Street Journal Thursday, January 23, Fair Isaac Corp., which creates and maintains FICO scores, is changing the way it calculates scores for some people. The net effect will be that it may be harder for many Americans to qualify for loans — at a time, note, when debt levels and personal loans have increased.
As for the changes themselves, people who already have “high” FICO readings above 680 and who are carrying the burden of their debt and making timely payments will see higher scores. Conversely, consumers with FICO scores below 600 who miss payments will see lower scores than previously seen.
Additionally, the outlet reported, Fair Isaac will “flag” borrowers who take out personal loans.
“The changes will create a greater gap between consumers deemed to be good and bad credit risks,” notes the Journal.
The changes seem to herald more conservatism in credit score, and greater attention to debt risk. The FICO changes also come after credit models began incorporating additional data (such as bank account balances) and removing some traditional score buffers such as civil judgments – reports. These changes tended to increase scores – and of course, the higher the FICO score, in general, the easier it is to get a loan.
“Some lenders see there are issues on the horizon in terms of consumer performance or uncertainty [about] how long is it [recovery] going away,” David Shellenberger, vice president of scores and predictive analytics at FICO, said in the report. “We are definitely finding pockets of greater risk.”
Lenders can adopt the new FICO scores — or not, and they can opt for a competitor like VantageScore. But FICO is traditionally used as a key factor in lenders’ decision.
New versions of FICO, including FICO 10 T, will put more emphasis on missed payments, which will lead to lower scores. And consumers who have high “utilization ratios” measured by borrowings divided by credit limits will also have lower scores.
“For the first time, FICO will place more weight on personal loans in a way that will penalize some borrowers. For example, consumers who transfer credit card debt to a personal loan but continue to accumulate credit card balances will likely experience a greater decline in their credit scores,” the outlet reported.
Experian reported late last year that Personal loan balances now stand at more than $300 billion, measured through the second quarter of 2019, and that total has increased by 11%. Credit card debt stood at more than $1.3 trillion, according to data from the Federal Reserve Bank of New York, at levels exceeding those seen more than a decade ago during the US financial crisis. . The average interest rate on cards is over 19%, as calculated by WalletHub.