October 12, 2009
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News: FICO in Sway of Economy
Major credit card lending banks are significantly modifying the weighting and acceptability levels of the long-time industry-standard FICO ratings. For example, two years ago a FICO rating of 650 was considered good (not great, but good). Then, last year, after years of stability, the "good" rating was raised to FICO 700. Now, today, the bar has been raised yet, again, to 750. What's more, an additional 50 points have been tacked onto the high end. Now, the perfect credit card score is all the way up to 900 (formerly 850). Almost like inflation, those credit card holders who have maintained FICO scores of 700 have been relegated down to the "barely acceptable" level.
Even if approved for a new credit card account, it's highly unlikely that those with FICO 700 scores will receive favorable terms. The main reason, of course ties to the horrible days back in October, November and December of last year. It was a grim Christmas Season, indeed. Lending banks of all kinds got pounded heavily. Credit card lenders were in a frenzy and had to halt new credit card offers long enough to contain the fire of unprecedented rate of credit card charge-offs (uncollectible debt).
Things are a little more settled now but, the lesson learned concerning credit card lending was the importance of using a reliable standard to predict risk. To that end, it seems like every trick in the book has been thrown at credit card consumers, just trying to find the right balance. Many mistakes in judgment resulted and are still happening but, the few savvy and wise large lenders have come to realize the importance of focusing on time-tested tools. Few would disagree that the FICO standard is probably the most successful tool available.
Of course, this model accommodates fine tuning by individual credit card lenders (as it should). The problem now is, how much tweaking is advisable by these banks. Most of the extremes have burned by stepping out too far. The new FICO '08 standard appears to be far better then the old (which was already 'pretty-good') but some of the lending institutions have yet to fully embrace this valuable tool.