Borrower credit scores and ways to assess risk are a priority and expected to become increasingly more important to the financial services industry.
A provider of analytics and decision management technology, FICO of Minneapolis reports over 2,500 banks and financial institutions have adopted its FICO 8 Score, used for consumer credit risk assessment inquiries.
The firm said this widespread market adoption occurs because lenders are focusing more and more on enhanced predictive analytics. Executives say today's tough lending environment demands tools like FICO 8 that are critical for lenders aiming to improve risk evaluation and avoid predictable losses.
Since July 2009 when FICO 8 Score was initially introduced it is available at all three national credit agencies, says vice president and general manager of scores for FICO, Robert Duque-Ribeiro.
"As the pool of prime candidates decreases, lenders need more precise segmentation in order to control losses and maximize profitability from their card and loan portfolios," he said.
User validations quantify the returns lenders can expect from integrating the FICO 8 Score into loan originations and customer management decisions.
The ability to more accurately identify each consumer's risk is crucial to mortgage lenders and credit card issuers alike.
More accurate scores can assist the lender in segmenting customers for cross-sell promotions and credit line increases.
FICO's in-house studies show that the FICO 8 Score improves credit risk prediction by up to 15% compared to traditional FICO Score models. It helps lenders "make better decisions across the credit lifecycle" and at the same time reduce default rates on consumer loans.
Executives say the strongest improvements in risk prediction are achieved in new consumer accounts and those who have a blemished credit history. In addition, this newest generation of FICO credit risk scores includes sophisticated features that help lenders better evaluate consumers who are comparatively new to credit.
Precise risk evaluation tools that assess new loan originations are very important to lenders, said director of pricing and credit risk analytics for Santander Consumer USA Inc., Mike Andra.
The new model is far more advanced than the standard FICO Score, its predecessor that has become the standard in consumer credit risk, across the retail banking, mortgage, credit card, auto lending and retail industries since it was introduced 20 years ago.
