FICO Studies Impacts to Consumer Credit Scores

“Our study suggests that lenders are using a scalpel and not a hatchet to trim their revolving credit exposure and meet their requirements for regulatory capital,” said Dr. Mark Greene, CEO of FICO. “This bodes well for the economy if we are counting on empowered consumers to stimulate growth and help end this recession. Based on our findings, the fundamental rules of Wall Street and Main Street still prevail. Both lenders and consumers perform at their best when they maintain smart, responsible credit strategies.”

FICO found that available revolving credit had been reduced for an estimated 33 million U.S. card holders between October 2008 and April 2009, up from an estimated 25 million card holders between April 2008 and October 2008. Of those 33 million card holders, the researchers found that credit reports for nearly nine million contained recent negative credit references such as reported late payments. Such “risk triggers” may have prompted lenders to reduce those customers’ card limits.

For the bulk of its study, FICO focused on the estimated 24 million consumers whose credit card limits were reduced despite the absence of any new risk triggers in their credit reports during the study period. The researchers found that:

• Card holders in this group had a median FICO credit score of 760, on the scoring model’s 300-850® score range.
• The average reduction in credit limit was found to be $5,100, more than double the reduction that FICO observed for comparable consumers six months earlier. However, $5,100 was only 14 percent of this population’s average total revolving credit.
• Credit reports for these consumers generally contained very low account balances, low limit-to-balance or “credit utilization” ratios, very few if any reports of missed payments, and a long credit history.
• Reductions in card limits were found to have negligible impact on the FICO scores of most consumers in this group. Once their available revolving credit had been reduced, FICO observed a drop in score for only a third of the people in this group, an estimated 8.5 million consumers, with the typical score drop well under 20 points.
• Of the remaining 15.5 million consumers, the company found that an estimated 3.5 million had no appreciable change in FICO score, and scores for the remaining 12 million consumers actually increased after their credit line had been lowered.

The study also found that credit limits and account balances continue to be significant factors in the prediction of credit risk for the general population. Consumers who use 70 percent or more of their available revolving credit were found to be 20 to 50 times more likely to become delinquent on a credit obligation within the next two years, compared to consumers who use less than 10 percent of their available credit.

“While revolving credit utilization is an important predictor of credit risk, our FICO scoring model is robust and considers many aspects of the consumer’s credit behavior,” said Robert Duque-Ribeiro, general manager and vice president of Scoring for FICO. “The findings from our study suggest that many people whose limits were reduced lowered their balances on other revolving accounts and in general managed their credit conservatively. These practices resulted in their ability to sustain or improve their scores despite reductions in their credit card limits.”

For its study, FICO evaluated depersonalized consumer credit information captured between October 2008 and April 2009. The study report will be available later this month as FICO’s newest Insights white paper. The FICO Insights series provides briefings on best practices, research findings and product innovations.