By the end of summer, finance companies could see millions of new prospect customers, while banks could see an equal decline.
Both can benefit.
Pending changes to FICO’s scoring models, to begin this summer, are expected to alter the credit ratings of nearly 110 million Americans*. One of the FICO score versions – the 10T – will have significant implications for lenders because it will measure how consumers manage credit over a greater expanse of time – 24 months.
This long-view measure will likely cause FICO scores to improve among consumers who pay off debt on time and have high credit ratings already – an estimated 40 million.
However, scores are expected to decline for another 40 million people. This is because the new model will apply greater weight to recently missed payments and to those who routinely use high percentages of their credit.
Lenders Should Start Strategizing Today
The major credit-reporting companies – Equifax, Experian and TransUnion – will offer the updated FICO scores by the end of 2020. Equifax will be the first, providing the new ratings sometime this summer**.
This timeframe gives banks and finance companies five to eight months to prepare for the resulting shift in prospect opportunities.
Here’s what to expect: Each credit-reporting agency will likely run comparisons of old scores against new scores to correlate the probability of delinquencies, bankruptcies, charge-offs and other credit worthiness predictors. As new scores become available, banks and finance companies should do the same – measure the old and new FICO scores against their own key performance indicators within their customer portfolios.
Essential to doing this quickly, and in making the most of these changes, is tracking the score velocity, or the shifts to FICO scores over time. This calculation will be critical for prospect prioritization, because new credit scores should be more fluid.
With the tools in place to measure the score velocity and other shifts, lenders will be poised to adjust their targeting of prospect pools accordingly.
New FICO Scores Mean a Shift in Opportunity
Certain banks will not see their prospect universes contract because many of the estimated 40 million people who will see a rating increase don’t need a better credit rating. They are older, financially secure and out of the borrowing lifecycle. Indeed, they are more likely to be saving and the chances of a bank convincing them to borrow money, even with a great credit rating, are limited.
On the plus side, the ratings difference will enable banks to better identify folks who are not suited for a bank loan at this time, helping them to better manage their marketing budgets by targeting prospects who are more suitable.
For finance companies, the opportunity is the inverse of those of the banks: The number of near-prime and subprime borrowers will increase, due to FICO’s new measure of factoring long-term credit behavior. This would broaden the finance company’s available universe to possible customers.
Setting Your FICO Strategies into Motion Now: 3 Action Steps
Following are three practical steps for ensuring your organization is ready for these changes:
1. Contact your credit bureau representatives. Lenders should have an understanding of when the new scores will be available with each rating company and then create a schedule to back-test the new scores. For example, a bank can apply the new and old score estimations to one of its customer portfolios to learn which is performing better. These tests will provide a sampling of what to expect on a larger scale.
2. Optimize those scores to the lender’s advantage. In addition to running their own models, lenders could apply analytically advanced third-party resources. SourceLink’s proprietary modeling resources, for example, are fueled by our accuLINK® consumer file of 270 million records. These insights can complement FICO score comparisons and the lender’s own performance indicators to isolate desirable prospects who will respond to direct marketing offers.
For instance, the FICO score velocity could indicate that customers who traditionally rated as prime borrowers will become near-prime in three months. Combining our data, a finance company could isolate additional sub-population prospects who are prime and near-prime as candidates to add to their prospect solicitation campaigns.
From a bank’s standpoint, the combined data could reveal a propensity to respond to a particular credit product and offer. If velocity is declining, the customer may be increasing credit use among other sources and respond well to your well-timed, competitive offer.
3. Let your customers in on the change. Prospects will trust banks and finance companies that are transparent and helpful about new FICO scores. These companies can offer free credit reports and provide advice and recommendations for strategies to improve the customer’s score through blog postings on their websites or social pages. A simple online review of what the new credit score means, especially in terms of what customers can do to improve their scores, will improve customer loyalty and relationships.
By following these three steps, both banks and finance companies will be prepared to connect with the best 40 million customers in each the rising and declining credit score universes. The insights from advance modeling can also provide opportunities to expand the obtainable universe of desirable customers and tailor existing products to new prospects.
The key is being primed today.
Written by: David Funsten – SourceLink’s Vice President of Financial Services Strategy. David has over 25 years’ experience in database marketing and customer relationship management, with a focus on direct marketing and omni-channel programs for retail banks and lenders. Reach out to David at firstname.lastname@example.org.
*“Your Credit Score May Soon Change. Here’s Why’”; by Tara Siegel Bernard; The New York Times; Jan. 25, 2020; https://www.nytimes.com/2020/01/25/business/credit-score-fico-change.html
**Ibid; “FICO Score Changes Will Hit Debt-Burdened Consumers Hard – Eventually”; by Sienna Kossman; The Balance; Jan. 24, 2020; https://www.thebalance.com/new-fico-score-4783058